Wall Street Boys Cautiously Bullish - Barron's

Includes: DIA, QQQ, SPY
by: SA Eli Hoffmann

Barron's interviews a dozen big-name Wall Street strategists, who predict a recovering stock market in 2009 - despite a deteriorating economy. With stocks already 18% higher than their late-November low, the group sees the S&P 500 closing 2009 at about 1,045 - tacking on another 18%.

So why should stocks rise in the face of such ambiguity? For a start, the strategists hope that a stock market that has already fallen 52% from its 2007 peak to its Nov. 20 low has discounted much of the deterioration still to come. With more than 37% of mutual-fund assets recently parked in money-market funds, the highest level since 1991, there's ample cash for bargain hunting should stocks dip below a certain threshold. Hopes run high that cheaper energy costs will support consumer spending, and -- most important -- that the deep freeze in the credit markets triggered by Lehman Brothers' collapse will continue to thaw. And everyone is counting on the government's aggressive policies to help stop the rot.

Not that they foresee a steady upwards trendline. In fact, most think we've still got a test of the Nov. 20 low in our not-so-distant future (February), after investors have had a peek at messy Q4 earnings. Some also predict another 'surprise' - such as a big failure, or debt defaults by a sovereign power. Still, with sentiment now so firmly and unswervingly negative, most feel the bias has shifted to the upside. "Just as we're surprised by the crisis' depth and severity going in, we might be surprised by how sharp the rebound can be going out," James Paulsen of Wells Capital Management says.

The speed with which markets reverse will depend on how swiftly financials recover. Some analysts think writedowns have already peaked, and predict we may even see (gasp) 'write-backs.' Conversely, if government policy fails and financial markets collapse further, all bets are off - and the S&P could see 400 before 1,045.

The bubble markets - commodities, real estate, hedge funds and private equity - were inflated with cheap money. The next bull, Barron's says, is more likely to be led by defensive segments like consumer staples and healthcare. 10 of 12 favor healthcare, five like tech (all buy-side), four like financials (all sell-side), two pick energy and only one materials. Here's a complete table with their picks (.pdf).