2010 Stock Market Outlook

I’ve never been a big fan of the New York Yankees.

But if there is one Bronx Bomber you gotta love… it’s Yogi Berra.

After all, Yogi could do it all in his day and he certainly had a way with words. In fact every year around this time, one of Yogi’s funnier lines haunts me as I sleep:

"It’s tough making predictions, especially about the future."

As one year ends and another begins, every analyst on the planet is busy working on their 2010 Stock Market Outlook. And despite the obvious pitfalls of making predictions, there is invariably a method to every analyst’s madness.

So with that in mind, here is my outlook for stocks in 2010.

My 2010 Stock Market Forecast

Before I lay it all out there, I thought I’d take a look at how I fared a year ago with my 2009 stock market outlook. As we head into the New Year, I think much of it is still relevant.

You see, the last the time I did this, the Dow Jones had fallen all the way back to 8600 in the wake of the Lehman Brothers collapse. Since that time, the Dow is actually up 18.6%, rewarding my bullish bias.

And while [admittedly] those predictions ran into some major roadblocks along the way, the rationale behind them turned out to be true. I called them my "Six Reasons to be Bullish in 2009."

And while none of them was enough to turn it around individually, I argued that — taken together — they would add up to a stock market that would eventually head higher. And somehow it worked.

In order, they were:

1. That the Fed was "all in" and would work to prop up the economy;
2. That the stimulus package would have a positive effect in the short term;
3. That low mortgage rates would help stabilize housing;
4. That stock market volatility would continue to decline;
5. That the recession would eventually begin to wane;
6. And finally, that stocks were actually relatively cheap on an earnings basis.

I bring these points up again today because, to a large extent, all of these factors are still at work in the current markets.

The First Half Playbook

What’s more, all of this money printing can only drive the greenback even lower, boosting the effects of the dollar carry trade that’s developed as a result.

The relationship is pretty simple: As the dollar falls, stocks rise. This trend should continue — at least in the first half of the year.

After all, with the 2010 mid-term elections now looming in the distance, "spending our way of out of this recession" is now the call of the day — and you can be sure the Fed will be a willing player every step of the way. That’s dollar negative, which is why gold can go higher from here.

As for earnings, they can be expected to confound the bears even further, since aggressive cost cutting measures have boosted profit margins across the board. As a result, earnings will beat expectations and trounce the year-over-year comparisons for the next two quarters.

In fact according to recent estimates, profits for the S&P 500 will rise by 25 percent — climbing to $78.61 a share in 2010, compared to $62.82 in 2009.

That should be enough to push the S&P to 1220 on a P/E basis at 15.5 times earnings, leaving 12% upside from here. What’s more: for technicians, that would complete the 61.8% Fibonacci Retracement I discussed last month.

Coincidently, that would bring us on a round trip, back all the way to September 2008, when the wheels basically came off the wagon.

Unfortunately, I do believe that the long, strange trip will represent the highs for the year, reached sometime in the first half of 2010.

The Second Half Playbook

Beyond that, the market will begin to realize that the current playbook is about close, which will be a negative for equities in the second half of 2010.

After all, while liquidity is all the rage these days, it’s still a Keynesian policy response that cannot go on indefinitely. Even the printing presses have their limits.

All of which bring us back another famous Berra quip: "It ain’t over ’til it’s over."

Our collective magic hat is fresh out of rabbits this time — something that wasn’t the case in past downturns.

For instance, when you look back at previous recessions, the way out them was pretty evident at the time: there were tax cuts and falling interest rates in the 80s; the 90s gave us the tech revolution; there was room to expand housing in 2000.

Conversely, today’s world lacks answers to our troubles.

Housing is falling… Commercial real estate is going bust… Interest rates have nowhere to go but up… Higher taxes are a given… Unemployment is creeping higher… and there is no brewing innovation with the same power that tech had to lift us out of our doldrums.

What’s worse, Americans have more than triple the debt they had in 1982 — and less than half the savings. On top of that, a bigger share of them has no home equity, leaving them one pink slip away from financial ruin.

These are tough balls to juggle in an economy that relies on consumers for 70% of the total spend.

These are the cold, hard realties that the government just can’t fix. And for the markets, that means the first half will be much better than the second will.

That’s my story and I’m sticking to it.

Your bargain-hunting analyst,

Steve Christ
Investment Director, The Wealth Advisory

P.S. To take a look at my outlook for gold as we head into 2010, click here. In a recent chat with gold guru Luke Burgess, we discuss what the New Year holds for the shiny metal.