We are close but not quite there, says Kaltbaum. He says comments a few weeks back from Pimco's high-profile bond manager, Bill Gross, that the "the cult of equity is dying" and the ongoing exit from U.S. stock mutual funds by individual investors suggest that stocks, if not hated, are severely under-owned and poised for a rebound. Stocks in the S&P 500 are trading at roughly 13.5 next year's estimated earnings, which is below the long-term average of around 15.
Randy Frederick, managing director of active trading at Charles Schwab, doesn't expect the market to hit new peaks until next spring at the earliest, adding that late 2013 is a more realistic timetable. The economy, he says, needs to first prove to investors that it can grow on its own and not be so dependent on stimulus from the Federal Reserve, as it has been since the 2008-09 financial crisis.
Jonathan Golub, chief U.S. strategist at UBS, says markets will be held back a little longer due to a lack of clarity on what's coming down the pike on the political and economic fronts. The market will find it difficult to march much higher until the economy and earnings perk up and investors' confidence rises. "We need greater visibility so that companies and investors are more comfortable with the path going forward," Golub says.
But that is not likely to happen, he believes, until after the November elections. Greater visibility on key domestic issues, such as tax policy and deficit-reduction plans, won't occur until investors know who the next president will be and what the power makeup of the new Congress looks like.
So what will it take for the S&P 500 and Dow Jones industrials to break their old record highs? Here are five potential catalysts:
1. A market and economy that can stand on their own. If there's one thing about the stock rally that is nagging at Schwab's Frederick, it is his belief that the recovery has been propped up by Fed stimulus, or what many on Wall Street refer to as a "sugar high." The bulk of the gains, he says, have been fueled by the Fed's bond-buying programs, dubbed QE1, QE2 and Operation Twist, which have flooded financial markets with liquidity and kept borrowing rates low.
And while stocks have responded with strong returns after each Fed intervention, the size of the gains and their duration have shrunk with each successive program. Frederick says the economy and stock market must be on self-sustainable trajectories before new highs can be attained.
"It is hard for me to believe artificial stimulus will push us to all-time highs," Frederick says. "We would have to have an economy growing on its own."
2. A global economy that skirts recession. It's what doesn't happen that will fuel a record-breaking run, predicts Smyth. "The only impediment (to a new high) would be a 2013 recession," he says. "Even anemic growth allows you to climb the wall of worry in 18 to 24 months."