“Companies need to start showing some real, sustainable earnings growth,in order for the market to keep delivering gains in 2010, as said by one of the analysts of the Forester Value Fund.
The good news is that those profits will probably materialize. Analysts look for operating earnings for S&P 500 companies to rise 27% from recession-battered levels, fueled primarily by improving economic growth overseas and a further weakening of the U.S. dollar (that makes our goods cheaper abroad and boosts exports).
So even if P/E ratios fall to historic levels, stocks still have room to move modestly higher, says Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research.
if the risks that the economy still faces over the short-term, the path to 6% gain may not be that smooth. “The easy money has already been made in the bond market too,” says Carl Kaufman, manager of the Osterweis Strategic Income fund. Most analysts now expect low- to mid-single-digit returns for both high-quality and “junk-rated” issues in 2010, and a skimpier 2% to 3% for treasuries at best.
Wild card:
To fill the gap created by the slowdown in consumer spending, U.S. companies must be focussing more on exports to fuel profits. If growth stalls overseas, corporate earnings and stock prices here will also suffer.
What to watch:
Keep an eye on the yield curve. A widening gap between the yields on 10-year and two-year Treasuries signals growth in the economy and corporate profits.
The action plan
Stocks:
Rebalance your portfolio — NOW!. Sharp market moves can quickly throw your asset allocation out of whack. That’s why back in March, with stocks down 57% in 18 months, Money advised moving swiftly to rebalance your portfolio to its normal stock-bond mix and maybe boosting your stock weighting by five percentage points.
Focus more on big guns . Also weigh shifts within the stock portion of your portfolio to reflect changes in market conditions. For instance, small-cap stocks with little (or no) earnings have been the big winners in this year’s rally, making blue chips look cheap by comparison.
Think globally. Next year business spending is expected to hold up better than consumer spending, especially in overseas markets. Goldman Sachs’s chief U.S. strategist David Kostin thinks energy, technology, and materials companies should see particularly robust growth, since they generate at least half their revenue from foreign markets. Jensen (JENSX) and T. Rowe Price New Era (PRNEX) are Money 70 funds with big bets on these sectors.
Bonds:
Stay short and focused on quality. To shield yourself from the twin risks of default and rising rates, stick with highly rated bonds that mature in five years or less. A smart choice: FPA New Income (FPNIX), which has a mix of top-rated corporates and munis. And don’t limit your foreign exposure to stocks; it makes sense to be looking abroad when it comes to some of your bondholdings as well. A solid choice: Templeton Global Bond (TPNIX).
Hedge against inflation. Subpar growth should keep a lid on prices next year. But inflation could reignite quickly after that, given the big money the government is pumping into the economy. Treasury Inflation-Protected Securities, which adjust your principal to keep up with rising prices, protect you against this threat. Buy them via a fund like iShares Barclays TIPS Bond (TIP).”In order for the market to keep delivering gains in 2010, companies need to start showing some real, sustainable earnings growth,” says Tom Forester, manager of the Forester Value Fund.