Year End Market Review

It’s that time of year again, the time when commentators, pundits and, these days, bloggers get to exercise their hindsight and look through the rearview mirror at the steps and missteps of the previous twelve months.

But smart investors don’t spend much time looking backwards. So, on Christmas Eve eve, as the year drew to a close, Dan “The Money Man” Frishberg invited his co-host of the day, Chicago options and futures trader Jack Bouroudjian and special guest, market analyst extraordinaire Elaine Garzarelli, president of Garzarelli Research, Inc., to trade in their rearview mirrors for crystal balls and talk about what they see coming down the road before them. So what did these masters of the market see coming toward them?

Elaine Garzarelli is one of the most successful people on Wall St. at predicting market turns, including the 1987 crash and its turn-around point, the 1990 bear market (and it’s end in September of that year) and the 2000 bear market in May of that year. She uses four indicators to make her forecasts – the economic cycle, monetary policy, valuation, and investor sentiment. Of those, only the last is pointing downward, while the other three are bullish, giving her an overall read of 71 percent. She says “they’d have to drop to 30 percent for a major bear market to begin again.” Several pieces of bad news would have to converge for that to happen: industrial production, which is growing at 6 percent now would have to drop below zero and we’d have to have the Fed would need to tighten the Fed Funds rate by over 200 basis points. That would bring interest rates close to the S&P 500 dividend yield, creating a situation in which the stock market would be competitive to cash positions. But those are not likely to happen. Historically, she notes when we’ve had a slow recovery – as this one has been -- they’ve lasted for a number of years. Her conclusion is that the cyclical bull market is likely to last for a long time.

As for a near term correction, she says in general when sentiment is as bad as it is right now it points to a coming 4-7 percent correction. “I would expect any correction,” Garzarelli told listeners to Radio Wall St.: The Money Man Report, “to not be on the order of the 10-15 percent correction that followed QE [Qualitative Easing]1 stopping in the spring but a lot less.” Generally, she added, these corrections last 3 to 4 weeks.

Garzarelli is expecting around 3 percent growth in the overall economy for 2011. The sectors that she sees with the best potential to keep growing through 2013 are the consumer durables, the industrial and transportation equipment and software area, and net exports. These sectors, she says, should start to outperform real GDP and therefore earnings will outperform the S&P. She also sees residential construction, fueled by favorable mortgage rates and increasing consumer confidence, as well as consumer wealth, which has increased 20 percent in the last year, along with the inexorable growth in population, all resulting in increased demand for new homes in the next three to five years.

What she would veer away from are the counter-cyclical, such as utilities, consumer staples and health care, three areas she sees as not growing as fast over the coming year or so, although they are going up right now while the cyclical sectors are going through the correction right now.

So that is what three of the smartest people you can listen to are seeing coming down the road. You can catch a ride with them or just go on traveling in the same direction as everybody else. But then, by the time that everybody catches up, the leaders have already moved on. That’s why some people drive Fords on the road of life while others sit in the back of stretch Lincolns.

(Excerpted from "Year End Market Review".)

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