Tuesday, December 14, 2010

Oh, No! Majority of Strategists Are Bullish on stocks for 2011

So I remain reasonably positive on the outlook for stocks next year - valuations are reasonable, other investment alternatives unappealing - but I now feel that I am squarely in the consensus of investor sentiment.

And that's not a good thing.

It was only 2 months ago, for example, that 66% of investors surveyed were bullish on bonds (according to Merrill Lynch) - right before one of the worst sell-offs in Treasury bonds over the last few years. Now only 26% are positive on the bond market.

(BTW: Chief technical strategist Mary Ann Bartels of Merrill remains of the belief that rates will be moving lower over the next few months, noting that there has always been the seasonal tendency for rates to rise at year-end).

It's not that the consensus opinion is ill-informed, or worse, it's just that when the majority of investors already believe something it probably is already reflected in market prices.

Here's an excerpt from Bloomberg:

Rising profits and cash balances will push the Standard & Poor’s 500 Index to the biggest three- year advance since the 1990s, surpassing forecasts for below- average returns, strategists at Wall Street’s biggest banks say.

The benchmark gauge for American equities will rise 11 percent from last week’s close to 1,379 in 2011, bringing the increase since 2008 to 53 percent, the best return since 1997 to 2000, according to the average of 11 strategists in a Bloomberg News survey. Goldman Sachs Group Inc.’s David Kostin, the most accurate U.S. strategist this year, said sales growth will spur a 17 percent rally in the S&P 500 through the end of 2011.

No New Normal as Strategists Predict 11% S&P 500 Gain (Update3) - Bloomberg.com

While I am concerned about being in the consensus, I still think that stocks can move higher. Not only are fundamentals appealing, the most recent tax compromise bill passed in Washington should spur the economy. Finally, there is nearly $2 trillion in investor cash that now sits in either money market funds or low-yielding short maturity bonds which may eventually move to the stock market.

But I'm feeling a little uneasy this morning.