Few Called Market Turn, Fewer Predict It Will Last

By AP / TIM PARADIS, courtesy of TIME

(NEW YORK) — Few analysts forecast this year’s remarkable stock market rebound as major indexes were plunging to 12-year lows last March. Now, with most experts predicting the pace of stocks’ gains will slow in 2010, there’s reason to believe they will be proven correct.

Stocks began the dramatic turnaround in March after Citigroup Inc. and other big banks said they were making money again, and then climbed at a fairly steady pace as signs of an economic recovery from the Great Recession became more pronounced.

Investor fears about a potential financial system collapse played a big role in the early year slump in stocks. Once it was clear that wasn’t going to happen, the Standard & Poor’s 500 index roared back 64.8 percent from its early March low, the biggest move since the Depression. For the full year, the index rose 23.5 percent, its best showing since 2003.

But sustaining that momentum in the new year likely would require a big drop in the unemployment rate and strong corporate profit gains, along with stable borrowing costs–a combination few analysts are forecasting.

"The easy money has been made already," said Bill Stone, chief investment strategist for PNC Wealth Management. "You’re not going to see another 65 percent move in the next nine months."

In the last day of the year, more signs of healing first pleased investors, then had them concerned about the economy’s ability to thrive without government help. Light trading volume exaggerated the market’s moves, sending the Dow Jones industrial average down 120.46, or 1.1 percent, to 10,428.05.

The year’s stats tell an incredible story across the financial markets:…

Stock market gains often come months before economic recoveries are confirmed. That’s because investors tend to bet on how they think business conditions will be six to nine months in the future. In downturns during the past 60 years, the S&P 500 index hit its bottom an average of four months before a recession ended and about nine months before unemployment reached its peak…

Ron Kiddoo, chief investment officer at Cozad Asset Management in Champaign, Ill., said the market can continue its rally through 2010 only if investors see that companies are again hiring, bringing the unemployment rate down for its present 10 percent rate, and that consumers start spending more.

"We can only go on promises of economic growth for so long without actually seeing it take place," he said.

Kiddoo added, however, that the market could see a tug-of-war because the Federal Reserve will be reluctant to raise interest rates to ward off inflation if the economy doesn’t strengthen. If rates remain at record lows, returns on cash and investments like government bonds will remain weak and create demand for riskier but higher-paying investments like stocks. Investors still have trillions of dollars in cash available, and many are anxious to get better returns than the minuscule yields offered by money market funds and short-term Treasurys.

"It becomes no alternative place to put your money," Kiddoo said.

Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati, said the market’s 2009-10 moves could parallel the period from 2003-04, when stocks took off then idled. In 2003, the S&P 500 index gained 26.4 percent as the economy pulled out of recession. Then, in 2004, the S&P 500 index peaked early and sputtered along before ending the year with a 10.7 percent surge in little more than two months.

Detrick expects stocks will end 2010 10 percent to 15 percent higher, but he said he also wouldn’t be surprised to see a drop of 10 percent to 12 percent for certain periods of the year. "You’re going to need to have some pullbacks and some breaks," he said.

Dan Cook, senior market analyst at IG Markets in Chicago, said he could see the Dow Jones industrials rising about 500 points to the 11,000 level in January but then pull back as the government withdraws some of its economic support, like low-interest loans to banks. He projects the market could fall about 15 percent from where it stands, putting the Dow industrials at the 8,800-9,000 level a year from now…

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