Sunday, December 15, 2013

Flashback To December, 2007: What Was The Outlook For U.S. Stock Prices?

The following shows the rising and falling periods for the U.S. stock market over the last 17 years.

After the fall in 2008-2009, we have once again risen relentlessly for five straight years. Any bearish sentiment toward the market has been completely washed away like the ocean tide. Open any outlook on the future direction for stock prices in 2014 and the answer is higher or much higher. See Here's What 14 Top Wall Street Strategists Are Saying About The Stock Market In 2014.  

In order to put this time period in perspective we can flashback to December 2007. Remember that the United States at this point was already in recession, and the market had already topped a few weeks before the forecasts were provided.

See if you can spot the major themes, which you will notice are the exact same themes you hear today on why the market will move higher in 2014.

1. The Fed's Easing Will Push Stock Prices Higher
2. Prices To Future (Estimated By Wall Street) Earnings Show Stocks Are Cheap
3. Cash On The Sidelines
4. Stocks Are A Good Buy Relative To Bonds

The following are the forecast summaries from Bloomberg's Where To Put Your Cash In 2008, December, 19, 2007.

WILLIAM GREINER, Chief Investment Officer, UMB Financial 

Greiner expects a combination of low stock valuations and lower interest rates to push the Dow up some 8% over today's levels. Moreover, he notes, "the market has a tradition of rallying pretty hard in the second half of a Presidential election year." Greiner favors companies that manufacture products consumers cannot do without, such as food and drugs. He expects such companies to deliver strong profit gains—of some 8% in 2007 and 10% in 2008—even as corporate bottom lines elsewhere stagnate. His favorite stock, Starbucks (SBUX), trades at about 23 times earnings—or "its cheapest level ever."

Greiner's Calls
DJIA: 14,400 (December, 2008)
S&P 500: 1520 (December, 2008)

TOBIAS LEVKOVICH, Chief U.S. Equity Strategist, Citigroup (C)

Citigroup's U.S. stock strategist is advising clients to buy beaten-down financial and retailing stocks and steer clear of stocks that have seen big run-ups. Of course, Levkovich's call amounts to good, old-fashioned investment sense ("buy low, sell high"). But there's no guarantee his timing is right. "Markets don't ring bells at the top or bottom," he replies. "If you wait, you will miss out." Levkovich believes bank earnings are likely to surpass analysts' ultralow expectations for next year. Why? A series of interest-rate cuts from the Fed, extending into 2008, will allow banks to reduce the rates they pay on deposits and repair damaged balance sheets. Meanwhile, he predicts retailers will benefit from healthy consumer spending, fueled by continued job growth. By Levkovich's calculations, stocks are at bargain levels seen in only 90 of the past 550 months. "In every single instance," he adds, "the markets were higher 12 months later."

Levkovich's Calls
DJIA: 15,100 (December, 2008)
S&P 500: 1675 (December, 2008)
Earnings: expects a rise of 5.2%

JASON TRENNERT, Chief Investment Strategist, Strategas Research Partners

His recommendation for 2008 is to stick with U.S. stocks. With corporate balance sheets strong and the U.S. unemployment rate low, Trennert figures the odds of a recession are low. He expects the Federal Reserve to cut the Federal Funds rate from 4.25% to 3.5% by midyear—averting a major credit crunch and fueling stock gains. At 15 times 2008 earnings projections, Trennert argues U.S. stocks are a good buy in comparison with bonds: The ten-year Treasury bond's 4.2% yield equates to a price-earnings ratio of 25.

Trennert's Calls
DJIA: 15,150 (December, 2008)
S&P 500: 1680 (December, 2008)

BERNIE SCHAEFFER, Chairman, Schaeffer's Investment Research

Schaeffer—a past winner of BusinessWeek's annual stock market forecasting contest—remains optimistic about the outlook for stocks in 2008. He expects a series of "aggressive" interest-rate cuts by the Federal Reserve to bolster consumer spending, economic growth, and stock prices next year, and for a weaker dollar to inflate the overseas earnings of multinational companies.

Schaeffer also scrutinizes various technical indicators, most of which, he believes, are currently flashing positive signals. For instance, he cites indicators of negative investor sentiment which, counterintuitively, are positive for stocks, since they signal there's a lot of money on the sidelines waiting to move into stocks upon good news.

Schaeffer's Calls
DJIA: 15,300 (December, 2008)
S&P 500: 1700 (December, 2008)
Earnings Growth: 7%
Asset Allocation: 80% to stocks

LEO GROHOWSKI, Chief Investment Officer, BNY Mellon Wealth Management

Overall, Grohowski is expecting the Dow to finish 2008 some 10% higher. But along the way, he warns, investors will be in for a choppy ride, as uncertainty about the economic outlook fuels "above normal volatility." Grohowski recommends a defensive portfolio. He likes U.S. stocks, because he thinks valuations are reasonable and because there aren't a lot of attractive alternatives.

When it comes to bonds, Grohowski favors municipals, which on an after-tax basis currently yield more than comparable Treasuries. "In almost any tax bracket, it makes sense to buy munis," he says. Later in the year, Grohowski thinks investors will be rewarded for taking more risk. He's expecting financial stocks to rebound. And he thinks international stocks still have room to outperform.

Grohowski's Calls
DJIA: 14,800 (December, 2008)
S&P 500: 1675 (December, 2008)

THOMAS McMANUS, Chief Investment Strategist, Banc of America Securities

McManus is expecting the Dow to decline by 3% in the first half of 2008 before rebounding to finish the year a solid 10% above current levels.

McManus' Calls
JIA: 14,700 (December, 2008)
S&P 500: 1625 (December, 2008)

DAVID BIANCO, Chief U.S. Equity Strategist, UBS Investment Research (UBS)

UBS's chief U.S. equity strategist expects economic growth to slow next year, to about 2%. But he believes the odds of a recession are less than 50/50, thanks to the Federal Reserve, which he expects to cut interest rates enough to provide relief to banks and, to a lesser extent, consumers. By yearend, Bianco sees economic growth heading modestly higher and the Dow at 15,250, or 14% above today's level.

Bianco's Calls
DJIA: 15,250 (December, 2008)
S&P 500: 1700 (December, 2008

Here's how it all worked out:


Next stop on the history tour:

Flashback to December, 1999: What Was The Outlook For The U.S. Stock Market?