Stocks: Modest gains?
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December 22, 2000: 12:21 p.m. ET
As forecasters turn to 2001, many see market posting tempered gains
By Staff Writer Jake Ulick
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NEW YORK (CNNfn) - The future has not been kind to stock market forecasters. During the late 1990s, Wall Street seers consistently lowballed the huge equity gains that later transpired.
And 12 months ago, nearly everyone underestimated the size of this year's sell-off, which, barring a furious rally in the last four trading days of the year, will hand the Nasdaq composite index its worst year on record.
Undaunted, top strategists at the nation's biggest financial firms are at it again. With an eye on next year, they divine modest gains for a stock market not known for sticking to plan.
Here's the plan: Interest rates should fall next year while corporate profits will grow in the high single digits. And stocks, according to many models, are currently undervalued.
This means that the Standard & Poor's 500, an index that comprises about 75 percent of the stock market's value, should rise modestly in 2001, posting gains near or above its historic average, according to a number of forecasts.
Here are predictions from some of Wall Street's most prominent prognosticators:
Edward Kerschner, chief global strategist at UBS Warburg, sees the S&P 500 hitting 1,715 by the end of 2001, up 34.6 percent from Thursday's close of 1,274.
He says stocks have reached "their most attractive levels since the financial crises of 1998." Kerschner's valuation argument, if true, is a powerful one. The Nasdaq composite, for example, has more than doubled since Oct. 8, 1998 when it bottomed at 1,419.21.
For more of the Year in Review, click here
Using what Kerschner has determined as the S&P's normal, historic value, the S&P index has the potential to rise 18 percent in the coming months to reach this valuation. Of course, changes in valuation are not always rational. And stock prices can be determined as much by sentiment, or what the market is willing pay, as by fundamentals like earnings growth and inflation.
In a nod to psychology, Christine Callies, chief U.S. investment strategist at Merrill Lynch, notes that investors are now a pessimistic lot, a far cry from the year-ago euphoria that helped the major indexes close 1999 at record levels.
She has a 1,720 target on the S&P 500 for 2001, up 35 percent from Thursday's levels. When it comes to sentiment, Callies sees fears about the risk of tech stocks fading. At the same time, she forecasts that the flight-to-safety buying that sent investors into utility stocks, real estate investment trusts and drug shares will run its course. "Most of the essential catalysts for a significant rebound in share prices are present," Callies said.
Morgan Stanley Dean Witter is more modest. The firm's U.S. investment strategist, Peter Canelo, projects a 1,600 finish for the index next year, up 25.6 percent.
Abby Joseph Cohen of Goldman Sachs sees the index reaching 1,650, the middle of the range. In a research note, Cohen looked favorably on a market landscape that, because of the tech sell-off, narrowed the valuation gap between growth and value stocks. "We conclude that the equity market should be a much friendlier place going forward, especially for those portfolio managers who focus on companies fundamentals rather than momentum strategies,"' Cohen wrote. "Careful selection will be the key to strong relative and absolute performance in 2001, as it has been since March 2000."
Jeffrey Applegate, chief market strategist at Lehman Brothers, is the most optimistic of all. He sees the S&P 500 at 1,800 by the end of 2001. Those gains of 41 percent from Thursday's close, if realized, would mark one of the market's best years on record.
Although John Bogle, the former chairman of the Vanguard Group, has gotten out of the business of forecasting, when pressed, he says the market could fall another 10 percent to 15 percent next year as the process of revaluing stocks amid "deflating expectations" continues. Old Economy stocks, he says, appear fairly valued. And technology shares, he says, are still high-priced. The average price-to-earnings ratio of the largest 100 Nasdaq stocks was 240 in March, Bogle says. That figure has declined to 100. "I still think that's hefty," he said.
While it may seem counter-intuitive, strong investor optimism like last year's usually gives way to falling stocks. And pessimism like that of today often signals a market bottom. So negativity is a positive.
"The negative sentiment we are seeing is a terrific Wall Street indicator," said Ned Riley, chief investment strategist at State Street Global Advisors. He also said the key to stocks' performance in 2001 will be interest rate cuts from the Federal Reserve, which are widely expected as early as January. "The key to it all is really going to be Fed policy," said Riley, who sees rates falling by as much three quarters of a percentage point in 2001.
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