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Be realistic with the stock market in 2010

 

Heath Jordan

Heath Jordan

Though not a soothsayer, state economist Phil Pepper believes predicting the economic forecast for 2010 is rather simple.

 

Be realistic, he says.

“I think we will see the economy improve gradually in 2010,” he said.  “But the growth will be slower than what people want or expect. I’d say I’m not optimistic or pessimistic, but on the side of realism.”

Many have predicted that the U.S. economy for the last 10 years has bubbled its way to the illusion of wealth. First the Internet bubble and then cheap credit financing a housing bubble lined consumer’s pockets with a seemingly endless growth in wealth.

“After the 2001 recession, consumer demand came back strong,” Pepper said.  “This time, however, the recession came about because of the housing bubble. But we’re fortunate in Mississippi that we were not hurt as much by the problems in the housing and financial institution areas.”

Jobs, or specifically the lack thereof, is the difference this time around, he said.

“We have a world competition for jobs now that’s caused the slower recovery,” said Pepper.  “The state has lost 60,000 jobs since Dec. 2007, after we had caught back up from the decline of jobs in the early 2000s.   Especially in the last year, we’ve seen manufacturing jobs disappear in Mississippi.”

To make matters worse, declining consumer demand and tightened credit markets have pushed unemployment rates to new highs.

“For the last 50 years, we’ve seen a trend of slower and slower growth, somewhere around 2.7 percent,” Pepper said. “I expect to continue to see this slow expansion period and there will not be a huge up-tick in the stock market.  Realism is going to set in with the stock market as we see sideways movement.

“A recession will last a year or two — recovery lasts anywhere from four to eight years.”

The S&P 500 PE ratio is the primary measure used by many investors to value the stock market and assess S&P 500 trend.  Historically, the S&P 500 PE ratio has a median of 15.7.  Last September, the S&P PE ratio was 86 based on a closing price of 1057 and trailing annual earnings of the S&P 500 of $46.36.
After the recent market rally, what should investors expect for next year?

Phil Pepper

Phil Pepper

A portfolio manager with Trustmark Investment Advisors Inc. in Jackson, Heath Jordan is optimistic about the stock market in 2010.

“I believe we will see positive returns next year, but with the S&P 500 trading in a range bound fashion between 1,000 and 1,300 during the year,” Jordan said.
But Jordan cautions that despite the S&P 500 Index enjoying the best nine-month rally since 1933, he doesn’t believe the next nine to 12 months will be a repeat.

“Market rallies can often be divided into three phases,” he said. “The first phase is characterized by substantial price appreciation in a short period of time and skepticism among investors.  We’ve entered the second phase where appreciation continues, but at a more moderate pace and with choppier price action as more investors come to believe that the rally might have some staying power.

“The third phase is typified by erratic market movements with little real headway made as experienced in late 2006 and 2007.”

Standard & Poor’s, as well as other firms, have increased their forecast for earnings in 2010.  Many analysts are predicting that the stock market is entering a period where the market, as defined by the S&P 500, will offer opportunity for stock pickers but very little for investors who buy and hold.

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