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  • Economist Survey Shows Reasons Behind Market Surge - Chad Brand

    The Wall Street Journal has released the results of its latest survey of economists and the results shed plenty of light on the recent stock market rally in the United States. Remember, the markets are discounting mechanisms so they should reflect current expectations of future economic activity. Sure enough, the survey showed that most economists believe the recession is over, which would explain why the S&P 500 hit bottom at 666 in early March and is now hovering around 1,000. 

    Below is a summary of the Wall Street Journal survey, in which 47 economists replied out of 52 who were sent the survey. 

    • 27 believe the recession is over
    • 11 believe the recession will end this month or next month
    • 6 believe the recession will end during the fourth quarter of this year
    • 71% believe Fed Chairman Bernanke has done well and will be reappointed for another term
    • The group believes the unemployment rate will reach 9.9% by year-end
    • The group believes unemployment will remain high (above 9%) throughout 2010
    • Only 6 economists believe the Fed will raise interest rates in 2009
    • More than 25% of the group believes interest rates will not be raised until 2011
    Keep in mind that these forecasts now represent the consensus view on Wall Street. That means that market gains could be limited even if they prove to be accurate. Clear improvement over these expectations will likely be needed for a meaningful increase in stocks from current levels over the remainder of 2009. 

    Disclosure: No Positions
    Tags: S P
    Aug 12 11:27 AM | Link | Comment!
  • With the S&P 500 Above 1,000 Investors Should Tread Carefully
     Chad Brand - Monday, August 10th, 2009

    The U.S. equity market has surged more than 50% from the early March lows and in only five months has recaptured the 1,000 level. It is easy to get excited about recent market action, but a closer look at historical valuation statistics show that investors should be treading carefully and viewing calls for a new bull market with a grain of salt.

     

    Operating earnings for the S&P 500 are expected to reach $55 this year, up from 2008’s trough level. That puts the stock market at 18 times current year earnings. If the economic rebound is sustainable, there is no reason earnings can not reach the $60 to $70 in 2010. With the median P/E ratio historically in the 14 to 15 range, a reasonably optimistic fair value forecast for the S&P 500 would be no higher than 1,050. We can get to that number with a 15 P/E on $70 in S&P earnings next year, but even that is a pretty aggressive profit picture. With the S&P closing at 1,010 last week, there appears to be limited upside over the intermediate term (in the short term anything can happen).

     

    As a result, investors may want to be cautious here, taking some profits and securing a nice chunk of cash to put to work should the market correct. Not only are we overbought from a technical perspective, but more importantly, historical valuation analysis and reasonable normalized earnings estimates show that the market is no longer undervalued to any meaningful degree. Therefore, I have taken client cash levels up to as much as 20% into this current rally, as I see it as quite risky to be 100% invested with the market up so much so quickly.

    Disclosure: No positions

    Tags: S P
    Aug 11 10:32 AM | Link | Comment!
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