Barron's Analyst Roundtable Q4 Forecast - A Mixed Bag

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Excerpt from our One Page Barron's Summary (receive it weekly by email by signing up here):

COVER STORY: Swimming to Safety — Fourth-Quarter Forecast by Kopin Tan

  • Summary: Barron's 12-analyst roundtable fourth-quarter forecast. Consensus: The markets are presently at a key turning point. Dissent: Where they go from here. Bullish arguments: 1) In 2004 and in 2005, a fourth-quarter rally lifted a flat market to gains for the year. 2) Inflation has peaked, or soon will. 3) The economy is resilient, and has proven tough to push into recession. 4) Investors will warm to stocks as inflation and recession concerns recede. 5) In 1995, as now, the Fed ended a campaign of interest-rate increases; stocks finished the year up more than 30%. 6) The current 15.5 P/E ratio puts the S&P near its 65-year average, which should provide support. 7) A 6.4% earnings yield on stock compares favorably to the 4.7% 10-year treasury yield. Bearish arguments: 1)Too much must go right for stocks to rally. 2) Potential upsets in the mid-term elections. 3) While the Fed didn't raise interest rates in August—for the first time in 18 meetings—the pause could prove fleeting if inflationary pressures resume. 4) In 12 of the last 15 credit-tightening cycles a bear market was either underway, or began sometime in the next four months. 5) Recent warnings of profit shortfalls from the likes of 3M (NYSE:MMM) and Deere (NYSE:DE) hint that conditions may be on the verge of deterioration. 6) Soaring home prices made Americans richer in recent years; the current slowdown will make many poorer. 7) The severity of housing's downcycle will affect how businesses invest and hire. 8) The S&P's muted price-earnings multiple is the market's way of predicting contracting earnings growth. Other points of interest: • Four of twelve strategists see the S&P falling through year-end; in the previous two years only 1 of 12 was openly bearish. • The median forecast puts the S&P at 1345 by year end. • Ten of 12 expect the Fed's target to hold steady at 5.25% through 2006. • Defensive stocks have historically outdone the market in the stretch between the last rate hike and first rate cut in a cycle. • Financials have been standouts in the interim periods, rising in five of the past six. • The favored sector is health care; 10 of 12 analysts gave it the nod. • Most expect large cap stocks to continue gaining on small caps in a long-anticipated reversal that began in 2006. Barron's bold one-line prediction: "When the curtain finally comes down on 2006, expect subdued applause."
  • Quick comment: Not to be outdone, Seeking Alpha contributors have weighed in with their fearless predictions for the coming months: In late 2005, Roger Nusbaum called for S&P between 1180-1219 by year-end; he continues to stick with his prediction. David Andrew Taylor sees the signs of recession knocking on the door. Phil Davis asks "Will History Repeat Itself," in a detailed forecast that foresees a possible winter dip before heading higher. Barry Gitarts notes that 8 of 10 of the all-time largest corporate buyouts occurred recently, while private equity still sits on nearly $1 trillion in cash, and boldly declares that all signs point to an upcoming bull market. Gaurav sees the equity markets spiking over the next three months. John Hussman predicts that stocks will lead the economy down. ContraHour calls for an overcast economy, with a 30% chance of recession. Paul Kedrosky takes a more pessimistic stance; he sees a 50-70% of recession. J. D. Steinhilber forecasts autumn blues, with a downside risk of 1150 on the S&P. Finally, Jack Miller advises: Buy the bull before it runs away!