Have stock prices gotten ahead of themselves? Some say yes
The summer stock-market rally has been more than just a pleasant surprise for beleaguered investors. It also caught some of the Street's top market watchers with their forecasts down.
When the S&P/TSX composite index surged past 11,000 this month for the first time in almost a year, it blew through the targets that many of Bay Street's most respected forecasters had predicted wouldn't arrive until the end of 2009. After many market strategists had updated their year-end targets in June and packed away their calculators for the summer, the Canadian market defied the traditionally listless investing season to stage its strongest summer rally in decades, rocketing 14 per cent from early July to the end of August – and then tacked on another 5 per cent in the first three weeks of September, usually the worst month of the year for the market.
Although several strategists scrambled to raise their year-end targets in the past week, an informal Globe and Mail survey found that the median forecast among top Bay Street prognosticators stood at 12,100 – a thin 5 per cent above the index's 2009 high of 11,585.73 reached last week. In the U.S. market, meanwhile, Bloomberg News reported that the S&P 500 was trading last week about 5 per cent above the average year-end target in its monthly survey of leading Wall Street forecasters, and had already surpassed all but one of the 10 targets in its poll.
With the biggest rally since the 1930s already in the books, but With the traditionally strongest quarter of the year for the market still to come, the strategists are now asking themselves: Are their expectations too conservative, or is the market too frothy?
“The truth is, nobody knows where all of this is going, short term,” said Kate Warne, Canadian market strategist for Edward Jones & Co. in St. Louis. She said the rapid moves of the market over the past year have made target-setting particularly difficult.
“It's difficult enough to get the direction right,” quipped David Rosenberg, chief strategist at Gluskin Sheff + Associates.
Even last week's trading caused forecasters to step back. After reaching their highest levels in almost a year, stocks spent the last half of the week in retreat (the S&P/TSX ended the week off more than 3 per cent from Tuesday's close), raising questions about whether investors were seeing a brief pause in the rally or the beginning of a long-anticipated correction.
Strategists said the rally, which has been built largely on expectations of an economic recovery that has yet to transpire, may need to see more concrete evidence of growth before it can go much further. “We've already bought and paid for a lot of the recovery we'll see in 2010,” said Myles Zyblock, chief equity strategist at RBC Dominion Securities Inc.
“We need to see the earnings [growth] come in,” Ms. Warne said.
She said the S&P/TSX could manage to claw its way to 11,800 before the end of the year, but predicted a “bouncy,” volatile ride to the end of the year – typical of a market searching for a new catalyst after a big move.
And, she predicted, the next few months could feature a rotation by investors out of the energy and financial sectors – which have led the gains during the rally and may have run their course – and into solid dividend-paying names that have lagged.
“It's a time of what I'd call ‘choppy consolidation,'” she said.
Chief strategist Stéfane Marion of National Bank Financial in Montreal, meanwhile, believes the Canadian stock market could be slowed by the U.S. dollar. The greenback's woes have been a major driver of this year's surge in the price of gold and, by extension, gold stocks, which make up 10 per cent of the S&P/TSX composite. But the currency has recently been showing signs of stabilizing, and could be about to turn upward.
“A U.S.-dollar appreciation will put some downward pressure on golds by the end of the year,” said Mr. Marion, who has decided to maintain his year-end target at 11,600.
But others argue that the growing global economic momentum, the Canadian market's resource-heavy tilt, and the country's relatively strong and stable economy leave the TSX well-positioned to extend its rally.
“My gut feeling is that we'll reach 12,000 closer to Christmas than next year,” said Vincent Delisle, strategist at Scotia Capital in Montreal. “I think it's going to be quick.”
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