Stock market forecasts tend to be sunny, and 2009 is no exception. Wall Street gurus are again predicting gains. But this year's bullish market call comes with an asterisk.
Wary stock strategists, unsure how the worst financial crisis since the Great Depression will play out, are hedging their bets. Rather than just sharing an opinion about what they think is the most likely outcome for stocks in their '09 outlook reports, some strategists are including worst-case and best-case market scenarios that reflect lower-probability outcomes — but ones that can't be ruled out.
Welcome to the new world of uncertainty on Wall Street.
After a year of tumult, highlighted by the near collapse of the financial system in 2008, the worst recession in almost 30 years and the biggest stock market decline since 1937, many investment pros appear hesitant to declare with 100% certainty that stocks will finish the year in the plus column.
In his 2009 outlook, for example, Morgan Stanley's Abhijit Chakrabortti lays out his base case — a 975 year-end close for the Standard & Poor's 500 index, or an 8% gain, based on Wednesday's close of 903.25 — as well as a scary bear case (-56%) and a super-optimistic bull case (+32%). Three distinct market scenarios are also outlined by LPL Financial chief market strategist Jeffrey Kleintop.
"The road to recovery is likely to be a bumpy one," Kleintop wrote in his outlook piece titled "Time to Opine on 2009."
"What happens further along the road depends on which fork the financial crisis takes us down. The heightened uncertainty … surrounding the economy and policy backdrop generates a wider range of possibilities than for most years."
A recent Citigroup survey of institutional investors reflects the wide disparity of potential performance outcomes for stocks next year. More than 20% expect the S&P 500 to rise 11% to 22% in 2009. But more extreme predictions — both pessimistic and optimistic — were also evident. About 15% think stocks could fall as little as 12% or as much as 39%. And about 15% said stocks could post gains ranging from 44% to 55%.
Here are three potential outcomes for the battered stock market in the new year:
1 ... Base case
This scenario assumes an economic recovery around midyear and a rebound in the stock market, which is a forward-looking animal, by year's end. It is deemed the most likely outcome given the time needed to ease the current stresses undermining investor confidence and zapping the strength of the financial system, credit markets and broader economy.
The base case is, in effect, the consensus opinion on Wall Street. A review of a half-dozen year-end S&P 500 price targets from top strategists suggests that stocks could rebound 8% to 22%.
The key underpinning of this outlook is a belief that the panic that gripped investors around the globe last year will begin to ease in the early stages of 2009, paving the way for a more normal functioning of financial markets in the months that follow, according to Kleintop.
An immediate economic recovery, given the dearth of consumer confidence caused by a weak holiday shopping season and rising joblessness, is wishful thinking. However, the outlook is expected to brighten when there are visible signs that the unprecedented government intervention that began in late 2008 — and that is likely to continue with the incoming Obama administration's massive stimulus plan — is starting to work.