We are bullish on the outlook for U.S. equities in 2010. Some
of us are more bullish than others, but it basically boils down to
varying degrees of optimism. In recent commentaries, we have
written that we thought the S&P 500 Index could trade in the
range of 1250 to 1350 by the end of 2010. As we review the
available evidence today, that still seems to us like a reasonable
range of expectations.
Every December, LMCM has a stock-picking contest designed
to surface investment ideas for our funds as well as to measure
levels of consensus and conviction on the outlook for
individual stocks, the economy and the stock market as a
whole. Each LMCM employee—not just the investment team,
but everyone—is asked to pick a 12-stock portfolio for the
coming year. Everyone is also asked to forecast next 12-month
returns for the major market indices—S&P 500 Index, Dow
Industrials and Nasdaq Composite—as well as a number of key
economic statistics, including real GDP growth and the CPI for
the coming year, and the year-end levels of the Fed funds rate,
the 10-year Treasury yield and oil prices.
Last year’s stock contest winners were head trader, Michael
Ray, and client service associate, Mark Andrusis, with 2009
returns of 144.62% and 113.14%, respectively. Composite
performance was also strong, with 75 of 82 twelve-stock
portfolios bettering the S&P 500’s +26.46% return, and the
median return exceeding +48%. Our group was bullish last
year, but as it turned out, not bullish enough. The group
forecast an average gain for the S&P 500 for 2009 of +14.69%,
while its actual return was nearly 1200 basis points better.
As noted above, our team is bullish on the outlook for U.S.
stocks in 2010, with average expected gains in the Dow, S&P
500 and Nasdaq composite of +15.69%, +17.24% and
+20.09%, respectively. Our Chairman and Chief Investment
Officer Bill Miller is even more optimistic about the market,
believing the S&P 500 could be up +20% or better for the
year. The group consensus is that real GDP will be about 3%
in 2010, the CPI will average 2.4%, oil prices will end the year
at $77.50 and the Fed funds rate and 10-year Treasury will
finish the year at about 1% and 4%, respectively. Bill is also
more bullish on the economy than the group consensus,
expecting real GDP to average +5.0% or better in 2010, and
believing the Fed funds rate will end the year at 50 basis points
and the 10-year Treasury will yield about 4.25%.
In formulating our expectations for the coming year, we
consider four factors: (1) historical precedent, which we
discussed earlier, (2) investor sentiment, (3) the outlook for
economy and corporate earnings, and, most importantly, (4)
market valuation.
Measuring investor sentiment is tricky, because the data is
often mixed, allowing people to see what they want to see.
Bearish investors see everyone else as too bullish and vice
versa for those who are bullish. That is why when sorting
through the data, we always try to remember veteran market
technician John Mendelson’s admonition to watch what
people do, rather than what they say. A number of investor
surveys such as Ned Davis’ Crowd Sentiment Poll and survey
of investment advisors have moved into “extreme optimism”
territory. So, many advisors and investors seem to be talking
bullish lately, but the flow of funds data we monitor suggests
to us that they are still acting bearish. In December, according
to data compiled by the Leuthold Group, mutual fund
investors withdrew $8 billion from U.S. focused equity funds,
bringing total net withdrawals for all of 2009 to $37 billion.
That is hardly bullish action, in our view. We would also note
that at the first hint of any market decline since March, the
CBOE Put/Call ratio has quickly soared to very bearish levels,
suggesting that investors remain very skeptical of the market’s
advance and are quick to take action to protect themselves on
the downside. In summary, while investor sentiment is
certainly not as bleak as it was in March 2009, we still rate it a
positive for the market, because we believe investors continue
to be too pessimistic about the outlook for equities.
To read the full report, go here.
(c) Legg Mason
www.lmcm.com
Most Popular Articles
