Stock analysts predict gains next year for U.S. equities. The S&P 500 will rise about 14 percent to 1,585 by the end of 2013 as earnings climb about 5 percent to $106.24 a share, according to forecasts from 15 Wall Street strategists tracked by Bloomberg.
The estimates imply a price earnings multiple of 14.9, about 9 percent below the average valuation since the 1950s, according to data compiled by Bloomberg.
“We’re not selling stocks here,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $170 billion, said in a Nov. 9 telephone interview. “Assuming we get some sort of compromise on the fiscal cliff issue, fundamentals are pretty good and stocks are not expensive.”
Opposing Objectives
Markets were whipsawed immediately after Obama defeated Mitt Romney. The election left the split between Democrats and Republicans largely intact, which is the worst possible outcome because it gives both sides room to claim “a mandate for their policies,” according to Barclays Plc strategist Barry Knapp in New York.
After being declared winner in Florida on Nov. 10, four days after securing a second term, Obama’s electoral vote count rose to 332, compared with Romney’s 206. A total of 270 was needed to take the presidency.
While Obama will meet Nov. 16 with House Speaker John Boehner, Senate Majority Leader Harry Reid, Senate Republican leader Mitch McConnell and House Democratic leader Nancy Pelosi, to avert another budget showdown, the Congressional Budget Office said Nov. 8 that the tax increases and spending cuts may trigger a recession. The changes would cause gross domestic product to contract 0.5 percent in 2013 and push unemployment to 9.1 percent from 7.9 percent in October.
Inevitable Drag
Obama and Congressional Democrats want to let tax cuts expire for individual incomes above $200,000 a year, while Republicans advocate extending them for all levels. The president wants to boost the two top rates to the levels they reached when Bill Clinton left office in 2001 -- 36 percent and 39.6 percent. He also wants higher taxes on capital gains and dividends and a smaller estate tax exemption and higher rate.
“We see little reason to increase the probability of avoiding the tax cliff or brinksmanship over the debt ceiling, or to expect pro-growth tax and entitlement reform in 2013,” Knapp wrote in a Nov. 8 research report. The firm sees 10-year Treasuries yields falling to 1.5 percent by year-end.
Even if the worst case -- prolonged political gridlock that sends the economy over the edge -- doesn’t occur, some fiscal policy changes will drag on growth.
‘Important Catalyst’
A two-year payroll tax holiday is scheduled to end Dec. 31 along with extended unemployment benefits, plus a new tax on investment income earmarked to help pay for the administration’s health care overhaul will begin.
“There’s a significant amount of fiscal restraint already baked into the cake,” says David Stockton, who retired Sept. 30 as the Federal Reserve Board’s director of economic research and forecasting.
Yields on 10-year Treasuries at about 1.68 percent imply the economy will tip into recession in the next year, Terry Belton, the global head of fixed-income and foreign-exchange research at JPMorgan Chase & Co., said in a video to clients on Nov. 5.
Rates on bonds are out of synch with economic data that signals the economy will continue to grow and expectations that the political impasse will be resolved, Belton said.
“A lot of things have moved where investors should have been willing to take more risk,” Belton said Nov. 8 in a telephone interview. “Just the resolution of the uncertainty I think will be an important catalyst for markets. It should push Treasury rates higher and equities higher.”
U.S. Payrolls
Belton said in his video report that he expects 10-year Treasuries to yield 2 percent by the end of 2012.
A net 171,000 workers were added to payrolls in October, after a 148,000 gain in September that was more than first estimated, Labor Department figures showed Nov. 2 in Washington. The Thomson Reuters/University of Michigan preliminary consumer sentiment index rose to 84.9 in November, the fourth straight increase and the highest since July 2007.
Residential real-estate prices as measured by the latest S&P/Case-Shiller index of property values in 20 cities increased 2 percent in the 12 months ended August, the biggest rise in two years.
Exports Climb
“The consumer is like an ocean-going vessel, it’s so large,” Richard Weiss, who oversees $16 billion as a senior portfolio manager at American Century Investment in Mountain View, California, said in a Bloomberg Television interview. “It doesn’t make hairpin turns. It has a lot of slow but strong momentum and we envision it pushing us into 2013 regardless.”
Bloomberg News
