Rising Tide

Stock Market Expected to Grow Along with Economy in 2011

Paul Valickus calls it “the Christmas-tree analogy.”
“Christmas tree sales over this past Thanksgiving weekend were up 12% year over year,” he said — and then wove that fact into his stock-market outlook for 2011. “That may sound a little silly, but it tells me that people were more confident and wanted to start celebrating a little earlier, to spend a little more money. It was an indicator of hope, if you will.”

President Michael Matty,

Paul Valickus (left), with St. Germain Investment Management President Michael Matty, says all signs point to a strong year on Wall Street.

It may be a small point, said Valickus, chief investment strategist at St. Germain Investment Management in Springfield, but it’s one of many larger trends — a decline in business vacancy rates and an uptick in employment among them — that point to rising confidence in a slowly improving economy, and that bodes well for the stock market in the coming year.
“I normally don’t make market forecasts, but I think this is an easy one,” Valickus said. “I think the economy and the stock market are going to do much better than most pundits are expecting.”
He cited last month’s Barron’s magazine forecast, which gathers the projections of 10 market experts, most of whom expect stock-market growth around 10%. “For me, that’s kind of a chicken forecast. A rise of 10% is what the market averages, trendwise, going way back. I think they’re just afraid to stick their necks out.”
Coming off the strong market surge late in 2010, George Keady hears the positive drumbeats, too, but has a different take. “That concerns me,” said the senior vice president and branch manager of UBS Financial Services in Springfield. “Don’t forget that what went on in November and December may have been an early 2011 gift. A lot of the movement in equity prices was a little premature.
“We’re expecting a moderate recovery in the economy — not a strong recovery, and not a double-dip,” Keady added. But because the market is all about expectations, he explained, that optimism has already been factored in. “When you see stocks move to the degree they moved in one month, that’s pretty optimistic. We have a positive outlook for next year, but part of next year happened in December.”
Boston Globe columnist Steven Syre agrees, noting that “a good deal of economic enthusiasm is already baked into the market. The S&P 500 index has climbed 21% in just the past four months.”

Changing of the Guard
Valickus, however, believes the upward movement is far from over, and he traces that belief back to the midterm elections two months ago, arguing that businesses spent the past two years in limbo in terms of their expectations about taxes, regulations, and other issues affected by the goings-on in Washington.
“Where I differ from a lot of people is, I think the economy will do a lot better than people expect, and I think the biggest catalyst is the November elections; people have a little more confidence in the business outlook now that Democrats lost their majority in the House.
“There’s a lot of pent-up demand out there,” Valickus added. “People were just afraid to do anything with certainty; they’re most comfortable having a Republican Congress going forward. Whether the Republicans are successful or not, there is that hope out there that maybe we’ll see a little more discipline in Washington. What the market abhors is uncertainty, and things now look a little more certain. Nothing is written in stone, but people are a little more comfortable.”
Writing in Barron’s, Kopin Tan sums up the view of the analysts who spoke with the magazine, noting that their modest projections about market performance bely a much more positive long-term outlook on the economy.
“A majority see 2011 as the year when a sustainable economic recovery takes root, winning over skeptics and persuading both companies and consumers to relax their stranglehold on squirreled-away cash,” Tan writes. “Improving confidence and low interest rates bode well for corporate profits. Meanwhile, the Federal Reserve remains hell-bent on propping up asset prices, and wages and prices of goods aren’t rising enough to sound an inflation alarm that would lead the central bank to alter its course of aggressive benevolence.”
Specifically, the strategists projected stock-market gains ranging from 7% to 17%. And while progress could be set back by global flareups such as trade tensions and conflicts in places like Iran and the Korean peninsula, Tan notes, “the market has started to flinch less at each flare-up of risk.”

Mixed Signals
At a time when rising interest rates are expected to weaken the bond market in 2 011, stocks are justifiably generating enthusiasm, but Keady pointed out that the picture is not rosy across the board.
For instance, he explained, while technology and consumer staples remain strong, health care and energy are charting a flatter course, and more than 30% of the companies in the S&P 500 overall were actually down in 2010.
Analysts note that prolonged cost-cutting and increasing consumer confidence, among other factors, point to long-term economic growth, but Keady said these market fundamentals still have to catch up with equity prices.
But in the short term, much of the market’s performance will depend on increasing confidence, and how long it can be maintained.
“What most people don’t understand is that the market can go up without the economy doing anything,” Valickus said. “People say, ‘wait, unemployment is 10%; how could the market go up?’ But it’s not what happened today; it’s what will happen tomorrow. That’s where a lot of people get confused.”
Still, judging by those Christmas trees in November — as well as plenty of other positive signs — confusion is giving way to confidence, and investors are putting more stock in the market.

Joseph Bednar can be reached at bednar@businesswest.com

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