Indeed, it may take only a handful of negative reports to cause investors to rethink their new-found optimism. Ian Aitken, managing partner with Pembroke Management Ltd. in Montreal, says the prevailing psychology of most investors is still negative. The memories of the crash may be fading, but they haven’t been forgotten.
“We aren’t expecting a return to a very ebullient time,” he says. “They don’t even need to become positive. They just need to become less negative.”
THREE REASONS TO BE BEARISH
1. U.S. political leaders can still mess things up
The country’s debt ceiling debate will start again as early as May, and House Republicans have said any new taxes are “off the table.” Brinksmanship akin to the August, 2011, debt-ceiling debate, which nearly led to a U.S. default, could shake global confidence in the country.
“Will we be any closer to a long-term resolution to debt limit by May 19? It doesn’t seem that way to me,” said Michael Hanson, senior economist at Merrill Lynch.
2. Corporate profits could stall
U.S. companies posted record margins in 2011, aided by depressed wages and low costs of borrowing; both of those factors seem poised to reverse. Analysts expect first-quarter profit growth for companies in the Standard & Poor’s 500 to average just 1.74 per cent in the first quarter before picking up later in the year; but of companies that have issued guidance for the first quarter, nearly three-quarters have come in under analysts’ numbers.
“Additional profit growth from here will, I think, be pretty hard to come by,” Mr. Hanson said.
3. Stocks may not be expensive, but they’re not cheap
The S&P 500 is up 127 per cent from its March, 2009, bottom and nearly 20 per cent from its 52-week low.
George Vasic, former Canadian equity strategist for UBS, said that in this time of peak corporate profit margins and a projected low-growth environment, a discount from the long-term average forward P/E of 14.5 is appropriate. He suggests 13 – which is about where the market is today. “Our view is there’s only a case for a limited upside in equity markets.”
THREE REASONS TO BE BULLISH
1. Investors could develop a new appetite for stocks
Retail investors have been pulling money out of stock mutual funds since 2007.
“In the U.S., people are still buying bond funds at a very healthy pace,” says Vincent Delisle, equity strategist for Scotia Capital. “Are we seeing the typical shift that confirms euphoria and the peak of the markets? No. We’ve just barely ended – maybe – a long stretch of redemptions for equities, and we’ve yet to see money get out of bonds.”
2. The U.S. economy is getting better – really
Most of the economic indicators reported in the past several months, from car and house purchases to employment numbers, have been heading in the right direction.
“House prices are bottoming and firming; there’s potential for their energy sector to do well; and the banking system appears to be more liquid, with credit growth generating job growth,” Mr. Vasic said. “There seems to be something stirring in the U.S. that looks sustainable over the next two to three years.”
3. A better economy may mean higher profits
Analysts expect revenues for the companies in the S&P 500 to gain 5.7 per cent in 2013’s first quarter, a higher rate than the expected 4 per cent for full-year 2012.
“When the economy picks up, you get higher revenues, and you get higher profits, because profit margins actually increase,” said Pierre Lapointe, head of Global Strategy & Research at Pavilion Global Markets Ltd. “What we’re seeing is an acceleration of the economy, and in that context, it’s very tough for us to be negative on equities.”