2010: Which stocks will rock?
outlook for equity markets in 2010 is as muddled as
ever after a year that only can be described as enigmatic.
Equities had one of the best runs ever off of the March
2009 low, but it sure didn’t feel bullish or that we
were in the midst of a recovery. Once there were actual
signs of recovery, the market corrected.
Both the Dow Jones Industrial Average and the S&P
500 rose during November and December 2009 and declined
in January, with the Dow off nearly 3%. But just because
it’s difficult to predict exactly where equities are
headed this year doesn’t mean there aren’t opportunities
in this market.
say the forecast is muddled. “People are scared to death
right now and that’s when opportunities are made. If
you put your emotions aside and focus on statistics,
statistics are showing a stronger economy, at least
in the first half of the year,” says Keith Springer,
president of Capital Financial Advisory Services.
equities market is looking for a recovery from the economy
at large, but no one is quite sure if that recovery
will happen in 2010.
was the year of deflation. 2009 was the year of reflation,
and 2010 is the year of indecision,” says Shawn Hackett,
president of Hackett Financial Advisors and author of
the Money Flow Report newsletter. Hackett says for most
of 2009, stocks and commodities markets were pricing
in a sharp V-shaped recovery for 2010, but the recovery
will be more gradual and equities will need to be repriced
to match moderate economic growth. “Some of the earnings
expectations that are built into the current stock prices
have been overpriced. For 2010 [there will be a] disappointing
economic recovery and equities having to correct downward
to compensate for downshifting expectations,” he says.
Larson, equities strategist at Morningstar, says the
question for 2010 is “where do we go from here?” “In
the middle part of 2009, we bounced pretty hard from
an economic standpoint. Now that we’ve got the initial
bounce, where we go is a difficult question. Does the
economy gain additional traction or do we go back down
and enter [a] double dip? It’s a tough call,” he says.
Wiggin, executive publisher at Agora Financial, says
2010 will bring the end of what he calls the “sucker’s
rally” of 2009, which wasn’t a real recovery. “Over
the long run, we’re looking for new lows past the ones
we saw in 2008. The rally we’ve seen is one of the longest
recession rallies in history and it’s not going to last
and when it starts falling it’s going to fall pretty
hard,” he says. “We’re going to be in a bear market
all year and it’s going to be difficult for people to
disagrees, saying equities are going to be much stronger
than people expect. “Professional money managers have
been bullish on this rally all along, but the individual
investor has been incredibly bearish and remains that
way, but not until they throw in the towel and start
buying will this rally be over. Professionals are only
calling for a 5-10% move in the market. [We could] see
a 15-20% move through the first half of the year because
the numbers are much stronger than people expect. The
two most important things for a stock market rally are
liquidity, and we’ve got a ton of it, and low interest
And speaking of low interest rates, analysts agree that
the Federal Reserve is unlikely to raise interest rates
in the near future. Some say not until 2011, with fall
2010 being the earliest prediction (see “Moving target,”
right). What the Fed does or doesn’t do will have an
impact on equities.
Reserve Chairman Ben] Bernanke’s likely to do things
in moderation. The market would be able to deal with
a gradual rate rise without having an issue with it.
[Raising rates] wouldn’t be a negative factor. For the
first three rate rises, the stock market tends to do
very well,” Hackett says, adding, “They’re not going
to be raising rates in 2010. It’s a non-issue. Growth
[isn’t] going to warrant it.”
says it’s unclear when the Fed will raise rates, probably
not until late 2010 at the earliest. “You’re going to
see a lot of withdrawal of liquidity-enhancing measures
at the Fed. Interest rates may be one of the things
that get moved when the Fed mops up this excess liquidity.
The interest rate move will be one of the last moves
[the Fed] takes, not one of the first.”
Roscelli, broker at Whitehall Investment Management
of Las Vegas, agrees that the Fed is unlikely to act
until late in the year. “They’ve got a very narrow window
[to] raise rates. It’s going to have to be very gradual,
unless you see a real, sustainable move up with the
employment figure,” he says.
says the Fed will not raise interest rates this year.
“The Fed does what it says it’s going to do. The Federal
Reserve and the Fed bankers have decided interest rates
will not go up in 2010, and I would believe not through
2011,” he says, adding that continued government stimulus
is still positive for the market. “Liquidity is coming
in droves by the U.S. government. Nobody likes that
it’s coming from the government, but the market doesn’t
know where it’s coming from. Money is money. I’m positive
on the stock market for the first half, and the economy
[will] start to rally.”
Springer says the economy is adjusting for a whole new
level of supply and demand with the aging baby boomer
population playing a major role. “With 78 million people
now reaching their savings stage, it’s affecting the
economy. That’s the biggest drawback for this market.
There aren’t enough spenders out there. Baby boomers
are past their peak spending years and are in saving
mode.” Despite that, he looks for the Dow to be at 11,700
and the S&P 500 at 1,265 by mid-2010 based on a
continued loose monetary policy from the Fed.
sees limited upside in the market and says a 10% to
20% setback in the stock market could happen at any
time. “The market is going to start to price in that
the economic recovery is going to be more subdued. If
they’re going to price that in advance, they should
start to price that in now. A 10% or 20% correction
could happen in the first quarter and from there the
market could stabilize and meander higher.” For mid-
2010, he predicts a high of 9,000-9,200 in the Dow and
950-970 in the S&P 500.
says, “We show the market to be fairly valued; it’s
neither overheated nor compressed and ready for a massive
rebound. It could go either way.” He expects both indexes
to move 10% higher from late January, to about 1,210
on S&P and about 11,000 on the Dow for mid-2010.
says in the S&P, the contract should find initial
support at 1,041 as volatility may begin to moderate.
He says the Dow should hold support at 9,890. “What’s
up in the air is what happens with inflation. If we
do start to see some kind of tick up in inflation, then
equities will find a boost and money will start to flow
into this market, which might allow us to bounce off
that 9,900 level and back up to 10,000.”
PICKS AND PANS
With the economy still on shaky ground and many analysts
split on general market direction, it may be best to
look for specific sectors that could outperform regardless
of general market direction. Analysts say this year
is a time to protect your portfolio rather than going
out on a limb and that means sticking to certain names
for high dividend-paying stocks. It’s a year where you
want to hold on to what you’ve got, try to make some
better money than 0%,” Hackett says. He recommends staying
in food and supermarket stocks, healthcare stocks and
companies that are not connected to the economic recovery
or lack thereof, have a lot of large excess cash flows,
are paying large dividends and are unlikely to raise
those dividends in 2010. “It’s a year to be defensive.
You don’t try to hit the home run or look for something
tied to a massive economic recovery,” he says. Hackett
recommends staying away from housing, banks, anything
tied to construction, and luxury goods, due to a decrease
in consumer spending.
agrees that healthcare stocks are looking attractive.
“[Healthcare] really sold off hard late in 2009 as health
care reform legislation inserted a lot of uncertainty
into the market. The sector has bounced back, but it
looks 10% undervalued with some names looking more attractive
than others,” he says. He says investors should avoid
media stocks as audience fragmentation in the broadcast
network world due to the Internet and cable continues.
also likes the healthcare sector, including healthcare
REITs and companies like Health Care Property Investors
Inc. (HCP), which focuses on aging baby boomers and
senior healthcare (see “Pick a sector”). He says investors
should avoid the consumer discretionary sector. “Stay
away from anything consumer-related. The baby boomer
situation is the biggest problem for the economy, so
the government is making up the difference. They’re
spending in the place of the consumer. They can do it
for about a year more before [the government] goes broke,”
says investors should stay out of the financial sector
and recommends REITs, but warns, “You have to do your
homework and see which properties are in [each REIT].
There’s going to be opportunity there if you get ones
that are managed well.”
too, says financial stocks are a no-go in 2010. “None
of the problems [of 2008] have been solved yet. They’ve
been papered over with bailouts. Stay away from any
of the blue chips that are dependent upon a strong economy
in the U.S. or Europe. We’re going to be in this low
growth phase for a number of years,” he says, adding,
“Companies that depend on retail spending are going
to be a nightmare.” Instead, he says investors should
focus on companies dealing with emerging technologies
such as stem cell research, which benefit from government
spending, and look to opportunities in emerging markets
like China and India.
AS SHE GOES
So how can equity investors protect themselves in 2010?
Analysts recommend doing your homework and not getting
emotional (see “Buy this, not that”).
with [your] head, not with [your] heart. Many people
are buy-and-hold mostly because they’re lazy. An investor
must have an exit strategy, but you’ve got to be tactical.
If the market looks like it’s going to get hammered,
don’t sit through it. Have an exit plan and make a strategy.
Don’t be afraid to sell things,” Springer says.
says flexibility is important, as is properly balancing
your portfolio, including in it things like futures
that do well in a volatile environment. “A lot of the
easy money has already been made, and that’s the thing
investors need to be aware of. Do your homework. Don’t
forget about what happened in ’08. Learn from it and
add things to your portfolio that will allow you to
ride out changes in volatility or turns in the market,”