Money Matters - Simplified

Expert Summit: Where Does the Market Go From Here?

Hard as it is to believe, it has been a year since Lehman Brothers'
implosion and the stock market mayhem that followed. Last fall, Bank of America (NYSE: BAC) bought Merrill Lynch overnight and AIG (NYSE: AIG)
was sent into cardiac arrest. After the dust settled in early 2009,
though, expectations -- and along with it, the market -- have steadily
risen. The S&P 500 has roared back 52% since March, with stocks
such as Goldman Sachs (NYSE: GS), Apple (Nasdaq: AAPL), and Freeport-McMoRan (NYSE: FCX) rising 80% or more. However, the index still remains 35% below its October 2007 peak.

For insights on where we go from here, I interviewed four experts to
see how they see things playing out for the rest of 2009 (and beyond).

Our panel includes Bob Doll, vice chairman and global chief investment officer of equities at BlackRock (NYSE: BLK); David Kelly, chief market strategist at JPMorgan Chase (NYSE: JPM); Uri Landesman, head of international equities at ING Investment Management; and Bernie Schaeffer, chairman and CEO of Schaeffer Investment Research.

The good news is that every one of them is bullish. They expect the
rally to continue, but not without a pullback along the way. What
follows is an edited version of what they had to say:

As we enter what are traditionally the two worst months
of the year, are you bullish or bearish on the stock market for the
rest of the year?

Bob Doll: I'm pretty neutral to be honest, but
if you push me into a corner one way or the other, I'll lean to the
bullish side. The market has run from a scenario six months ago where
people thought the world might end. I think a lot of the rally has been
about that view being too negative.

Have we started to bake some recovery in? We have, but the debate of
course is how quick will it be and therein will lie the pattern for the
market. I think there is enough skepticism out there, enough cash on
the sidelines, and enough improvement of the news that the path of
least resistance remains to the upside.

Having said that, I think we'll have a bump sometime between here
and the end of the year. Markets never move in a straight line and
we're due for a consolidating setback.

David Kelly: The bottom line is that I'm
bullish for long-term investors. I don't think that we can profitably
try to time which month to get in or out of the market.

For the long term, I think that although the market is off its lows,
those lows were extraordinarily low. If you believe the economy will
gradually recover over the next few years, then I think there will be
very good gains for stocks -- very likely double-digit annual returns
on average over the next five years. So I would be overweight stocks.

Uri Landesman: If you held a gun to my head,
I'm bullish, with the following caveats: My end-of-the-year target on
the S&P is 1135. Now, it's possible that we'll see 900 before going
to 1135. So short-term what's going to determine this market as much as
fundamentals is technicals.
I think we will see somewhat of a correction over the next two months,
with important support at 970, 930, and especially 900 on the way down.
The next level up is 1225.

Bernie Schaeffer: We like the market's
prospects from here until year-end. The "too far, too fast" mentality
is one of several "fear factors" that has kept cash on the sidelines --
cash that might be deployed in the future to drive further gains and
contain pullbacks.

The market will bump up against key technical areas along the way,
so it won't exactly be a smooth ride higher. Pullbacks should be
shallow, despite growing anxiety among many professional traders who
continue to fear a sharp pullback as we move into historically weaker
months.

What's the catalyst to drive us higher, or lower for that matter?

Doll: For higher, continued evidence that the
economy is improving -- lower unemployment claims, slow but steady
improvement in the other jobs numbers, continued improvement in leading
indicators (which have been screaming higher), more signs that
inventories are being rebuilt, and an uptick in business and consumer
confidence.

If these all continue to improve as they have now for several
months, I think the market will work its way higher. What could set us
back, aside from that not coming true and the opposite, is some sort of
notable credit bump. I think we'll have some credit bumps, but I think
they'll be small enough generally speaking that the market will absorb
it.

Kelly: What would drive us higher is just the
continuation of better economic news. The problem is that it has been
27 years since we have seen a big recession, and most people don't know
what an economy does after a big recession. The truth is after a
recession like this, as was the case with the prior two recessions
we've had like this, the economy grew by 7% on average in the first
year.

No one expected that and I'm not expecting that either, but I think
we could easily do 4% GDP growth over the next year. That's a lot more
than people expect. So I think this gradual confirmation of close to 4%
economic growth is what could power the market higher because it's
beyond peoples' expectations.

What could cause it to go lower? There are plenty. One is oil. I'm
very worried about how volatile oil markets have been ... we had a
damaging asset bubble in oil in 2008. We could see a resurgence of
that, which could be a good recipe for a double dip recession.

A second thing I worry about is the consumer sector. If consumers
decide to save more and more, then that could cause the expansion to
stall out.

A third thing I worry about is commercial real estate. There are a
lot of losses that are going to have to be taken by banks from
commercial real estate loans -- both direct loans and collateralized
mortgage obligations. If that affects bank lending that could be a
significant problem.

Landesman: I think confidence throughout the
system will be the catalyst for the market to go higher. Confidence
from the financial players -- that if they extend credit it will be
repaid. Confidence from the borrowers be they enterprise or consumer,
that they've got the ability to repay those loans. Lastly, confidence
that the equity that you have in your house is safe and that your job
is reasonably safe. It will be gradual.

Schaeffer: Catalysts that could drive us lower
is a second-half rebound that does not surface, a Fed that suddenly
changes its tone and begins a parade of premature interest rate
increases, or unemployment numbers that become worse than even the
darkest projections.

There are numerous catalysts that could send the market higher,
which center around a long list of fears that if not realized could
move cash off the sidelines and into the market and cause further short
covering. In other words, if these fears prove to be invalid or not as
bad as advertised, we'd expect buyers to come off the sidelines.

Earnings are still in a position to surprise to the upside, as
skeptics abound about cost-cutting being the major driver these days.

Expectations for the consumer are very modest due to debt loads,
higher saving rates, and unemployment trends. Yes, this could pressure
consumer spending, but to the extent this fear is baked into the stock
market already, the expectation bar for the consumer has been lowered,
making it easier for positive surprises.

Other fears revolve around the potential for an increase in
government regulations and the potential for a commercial real estate
market collapse. If the impact of these factors is not as great as
expected, or if they do not surface like expected, these would be other
catalysts to draw cash off the sidelines and into the stock market.

 

Copyright 2009 by United Press International.