Dow 5K on Horizon: Nenner
Double-Dip Coming — 20-25% Pullback Likely: Strategist
Stocks opened lower for a fifth straight day Wednesday, following a disappointing durable-goods report. Joseph Keating, executive vice president and chief investment officer at CenterState Bank, and David Hefty, chief executive of Hefty Wealth Partners, discussed their market outlooks.
“We’re continuing to see the market trade with the theme of decelerated growth,” Hefty told CNBC.
“We have to have the economy grow and we're not seeing that happen—it’s going to lead us into a double-dip recession.”
In the worst case, Hefty expects markets to pull back 20 to 25 percent with more losses in 2011.
“What points us to that direction is that wages and disposable income across the country is coming down. Housing prices had a rally over the last 12 months or so; however, we’re seeing that tip the other way,” he said.
'Not the Way to Grow'
In the meantime, Keating said there needs to be changes in Washington’s policy in order for the economy to turn around.
“We need to send a message that big government spending, big taxes, big deficits, rule-making is not the way to grow the economy,” he said. “We have to elect people that will bring us back to a smaller-government, more incentive-driven policy.”
Forget the Double-Dip: Stocks Still Can Rise in Bad Economy
Even if the economy performs as poorly as expected for the rest of the year, that may not mean bad times on Wall Street.
Some analysts maintain that cheap valuation will provide a boost to the markets in the current downtrend.
In fact, during times of slow economic growth since 1990, stocks have risen twice as often as they have fallen. The trend is important to remember amid a series of GDP downgrades from major analysts and worries that the economy even could fall into a double-dip or worse.
Many major analysts—Goldman Sachs and JPMorgan among them—have cut their GDP projections to below 2 percent for the third quarter and about 2 percent for the fourth. What that means for the stock market, though, may not be so obvious.
"Basically when you look at GDP numbers coming out they usually are not a very good predictor of the stock market," says Sam Stovall, chief investment strategist at Standard & Poor's. "It's sort of the other way around. The stock market tends to predict movements in the economy by six months."
The recent history of economic slowdowns is one of opportunity for stock-buying investors, sometimes in the extreme.
Take 1995, for instance. With GDP trudging along at a respective 1 and 0.9 percent pace in the first and second quarters, stocks were booming. The Standard & Poor's 500
[.SPX 1047.67 -4.20 (-0.4%) ] gained 9 percent in the first quarter, then kept the momentum going with an 8.8 percent rise in the following three months.
The 2001-2003 recession also saw good times for the market. GDP grew 1.4 percent in the fourth quarter of 2001, while the S&P rose 10.3 percent; growth was 0.1 percent in the fourth quarter of 2002, vs. an S&P gain of 7.9 percent.
The average stock market result on the 18 quarters between 1990 to 2010 when GDP was between zero and 2 percent was a gain of just under 3 percent.
One of the keys to the reverse coordination between the two measuring sticks is that stocks tend to do well when nobody expects it.
"When you have lowered expectations you can have a potentially good rally," says Ryan Detrick, senior analyst at Schaeffer's Investment Research in Cincinnati. "It makes sense that at times when you have lukewarm growth but overall expectations are probably lowered, you can have those upward surprises in the stock market."
Stocks even have held their own during times of economic contraction.
Of the seven negative GDP readings during the same time period, the S&P rose three times, including the 15.8 percent gain in the second quarter of 2009 when GDP fell 4.9 percent, and a 13.6 percent rise in the first quarter of 1991 when GDP fell 1.9 percent. The average was a gain of 1.23 percent.
"You've got this economic growth piece, but then you've got this other piece which is, 'What do I do with all this money in a money market paying me 0.25 percent?'" says Nadav Baum, executive vice president at BPU Investment Management in Pittsburgh. "That's the dilemma that investors are looking at, and they're starting to realize that 'I'm probably OK to go out and buy big dividend-paying stocks.'"
With the possibility of the US economy slipping back into negative growth posing an increasingly high danger, the notion that stocks can still rise might provide some comfort to equities investors.
Economist David Rosenberg of Gluskin Sheff on Tuesday reiterated his assertion that the US economy is not in a recession but rather a depression. But even he pointed out that stocks rallied sharply for several years during the Great Depression before falling again.
"Even though the GDP number is getting weak, that doesn't mean stocks can't go higher," Baum says. "It's not just a factor of GDP. There are other forces that can help stock prices go up right now. The bigger factor is, 'Where can I do to make the money on my money?'"
S&P's Stovall argues that valuations continue to be attractive based on current consensus earnings estimates.
The current S&P price-to-earnings ratio on a non-Generally Accepted Accounting Principles basis is 14, which Stovall says is a 26 percent discount to the average P/E on trailing earnings on records dating back 22 years. On a GAAP basis, that number goes to 17, which is actually a 36 percent discount to average over the same 22-year period, and is level with the average GAAP basis since 1936.
S&P actually is projecting that stocks could fall on a short-term basis back to a bear market—20 percent drop from the April 23 highs—before shoring up and turning positive. The firm has a 1,190 price target for the "500" in the next 12 months, a jump of about 13.5 percent from the current level. The index has fallen 14 percent from the April high.
"Unless we expect earnings to actually decline moving forward, rather than advance at a slower pace, I would tend to say that valuations would stop us from seeing anything more than a light to average bear market," Stovall says. "The market is readjusting itself. Maybe we could end up seeing a sharper move downward in the next month because investors want to get it over with.
Gold Is Like Tech in 1999: Chief Investor
- Dow Faces Bouncy Ride to 5,000: Strategist
The DJIA will lose about half of its value over the next couple of years as it follows a Nikkei-like pattern, according to Charles Nenner of Charles Nenner Research.
- Doug Kass: 'I Just Can't Be That Negative Now'
Despite the Dow dipping below 10,000, famed strategist Doug Kass thinks doomsayers are missing key points.
- 'Fast Money' Traders: If S&P Breaks 1010, Back to 878?
With stocks at 1-month lows, investors are starting to worry that serious storm clouds may be gathering over the Street.
- A Troubling Large Number of New Lows
Worries about the economy and another poor round of economic data continue to weigh on the markets.
- Housing in 'Double-Dip': Zandi
The US housing market is in a double-dip recession, Moody’s Analytics chief economist Mark Zandi told CNBC.