Birinyi: Bull market that defies strategists will continue
Renowned investor says shares will climb for years to come if history is any guide
Laszlo Birinyi, whose prediction the bull market would weather a five-month retreat came true in October when the Standard & Poor’s 500 Index rallied 11 percent, says stocks will keep climbing in 2012.
Equities will gain at least 8% as improving corporate profits force bears to capitulate, according to Birinyi, who manages $400 million in Westport, Connecticut.
Forecasts for declines from economists Gary Shilling and Nouriel Roubini were repudiated in 2011 as the benchmark gauge for American equities erased a 13% drop.
Birinyi, who advised holding stocks in August as the US government was stripped of its AAA credit rating and strategists cut forecasts faster than any time since the credit crisis, said shares will climb for years to come if history is any guide.
Shilling, president of A. Gary Shilling & Co., predicts equity investors will lose money in 2012 as consumer spending drops.
“Many concerns are opinions, but not necessarily facts,” Birinyi, president of Birinyi Associates Inc., said in a telephone interview on last Wednesday. “Later in the year, things will get a little bit better and sentiment will change, and we end up at the last leg where we’ve got the last-guy-in-the-pool scenario.”
ANNUAL 28% RETURNS
The S&P 500 has risen 89% since March 2009, returning 28% a year to investors including dividends as US gross domestic product expanded at an average rate of 2.4% over nine quarters. After ending 2011 virtually unchanged, the index gained 1.6% to 1,277.81 last week, the biggest rally to start a year since 2006.
While US stocks avoided a bear market in 2011, they posted their biggest decline since 2008, falling 19.4% between April and October. Investors outside the US suffered bigger losses, with the Stoxx Europe 600 plunging 26% and China’s Shanghai Stock Exchange Composite Index tumbling about 30%. About $6 trillion was erased from global equity values last year, the second annual decline since 2002.
The Chicago Board Options Exchange Volatility Index, a gauge of investor concern derived from equity derivatives, averaged 24.2 in 2011, the third-highest level in the last nine years behind 2008 and 2009, data compiled by Bloomberg show. It reached a 29-month high of 48 on August 8. The Dow Jones Industrial Average swung 400 points for four straight days for the first time ever in August.
STRATEGISTS CUT
The average S&P 500 estimate from 13 Wall Street strategists tracked by Bloomberg fell more than 9% from May through November, the most since 2009. Their forecast for a 6.4% increase in 2012 at the start of this year was the most conservative since 2005, Bloomberg data show.
“Even though we were basically flat, this was a really volatile year,” Peter Sorrentino, a senior fund manager at Huntington Asset Advisors in Cincinnati, who helps oversee $14.5 billion, said in a phone interview last Thursday. “Negative sentiment is what trapped the US market, and then we got range bound because the fear that if Europe slips into a major recession, it takes us with them.”
Birinyi, an equity trader at Salomon Brothers Inc. in the 1980s, was one of the first investors to recommend buying when stocks bottomed in 2009. He stayed bullish through the S&P 500’s decline of 16% in 2010 and last year’s tumble to 1,099.23 on October 3 from 1,363.61 on April 29.
‘WE WERE UNCOMFORTABLE’
“Quite frankly, when the market got down 19 percent, we were uncomfortable,” he said in a phone interview last Wednesday. “But we were uncomfortable in 2010 when the market went down 15 percent, and it ended up recovering.”
US equities are in the third of four bull-market stages, in which investors accept the rally that gathered momentum in the first two, according to Birinyi’s analysis. He said this phase, which started around July, should end in 2012 with a gain of at least 8%. The bull market’s final phase of “exuberance” has lifted the S&P 500 an average of 39% in the five advances since 1962, he said.
S&P 500 earnings have beaten estimates for the past 11 quarters and are forecast to climb above $100 a share in 2012, according to analyst projections compiled by Bloomberg. A ratio of debt to assets for S&P 500 companies reached its lowest point since at least 2002 in the third quarter, Bloomberg data show.
BULLS UNDER PRESSURE
Bulls such as Birinyi came under pressure in the second half of 2011 as the S&P 500 tumbled 5.7% in August and 7.2% in September. It lost 4.5% on August 18 when the Federal Reserve said factory production in the Philadelphia region had reached a 29-month low. The index lost more than 5% over two days twice before bottoming on October 3, the first time after the Fed cited risks to the economy on September 21, the second after consumer spending slowed on September 30.
Stock swings increased as economists cut their forecast for 2012 GDP growth from 3.3% in February to 2% in October. Roubini, the cofounder and chairman of Roubini Global Economics LLC in New York, put chances of a contraction in developed economies at 60% and said investment gains would prove temporary. The S&P 500 is up 4.5% since he spoke October 18 at an Asset Allocation Summit in London. Roubini declined to comment on his outlook.
Shilling said in September that equities were likely to drop and that earnings would fall short of estimates. He predicted in August that the US would enter a recession this year. While he missed the 17% rally that began October 3, he’s betting on a retreat as consumers save, the economy shrinks and profits fall.
‘TOUGH-GOING’ “It’s probably tough-going for the equity markets this year because the expectations are that the economy is going to be strong and corporate profits are going up,” Shilling, who contributes to Bloomberg View, said in a phone interview last Wednesday. “I don’t think that’s realistic. I think we’ll probably have a decline in earnings, which feeds off the forecast of a moderate recession.”
Michael Shaoul told clients of Marketfield Asset Management on September 14 and September 23 to hold stocks because the decline would not last. While investors were right to be wary of Europe’s debt crisis, calls for a US recession were unwarranted, according to Shaoul, who helps oversee $1b. in New York.
‘VIOLENT MARKET’
“This was a particularly violent market,” Shaoul said in a phone interview last Thursday. “At some point in time those negative things are going to matter a great deal, but not at this point in the cycle. It still looks to me that the US equity market should be able to surpass that 2011 high.”
The S&P 500 has risen about 7.1% during the third year of a bull market and the priceearnings ratio increases 6.3%, according to Bloomberg data dating back to 1960. The index is trading at 13.5 times reported earnings, compared with 15.8 in February and about 18% below the 16.4 average since 1954, data compiled by Bloomberg show.
Alcoa Inc. was the first Dow company to report earnings for the last three months of 2011 on Monday when the largest US aluminum producer posted its first quarterly loss in more than two years. Fastenal Co. and ebay Inc. are among the companies scheduled to report in the next 10 days that analysts forecast will see an increase in earnings, according to estimates compiled by Bloomberg.
“What we can see is that companies are still in business, balance sheets are good, earnings are still there and the negative case continues to be somewhat sketchy,” Birinyi said. “The potential for surprise does exist.”
(Bloomberg)