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David Darst and the folks at Morgan Stanley Smith Barney took a decidedly bearishstance on stocks early in October.And in their latest Asset Allocation and Strategy Commentary report, Darst and company are sticking to their call.
On Oct. 6, 2011, the MSSB Global Investment Committee recommended (and still does) that investors overweight safe-haven assets and underweight risk assets, reflecting global concerns about policy efficacy, ongoing household and sovereign balance-sheet deleveraging, recession in Europe and slowing growth in China and the US.
Here’s their latest round up of bearish and bullish factors for the stock market.
Equity Bearish Factors
- As of the end of March, US unemployment was 8.2%; the broader measure of unemployment, U-6, was 14.5%.
- Medium-term GDP growth may be held back by: (i) continuing foreclosures, home-price weakness, and a significant shadow inventory over- hang; (ii) bank, government, and household deleveraging; (iii) state, lo- cal, and federal government fiscal austerity measures; (iv) Europe being in a recession; (v) decelerating growth in China, India, and Brazil; and (vi) lackluster jobs growth, industrial production, construction spending, and personal income data.
- Global investors and officials have continuing concerns about the quality, maturity structure, and magnitude of several countries’ sovereign- debt burdens and their ability to service such obligations.
- Germany, France, several other Euro Zone countries, the UK and the US have been implementing fiscal austerity measures; absent political change, US fiscal drag will likely be significant in 2013.
- US stocks are not undervalued using long-term earnings metrics; the Shiller P/E—that is, price divided by 10-year average earnings—for the S&P 500 is 22.7, 38% above its long-term average.
- Real median household income has fallen 10% since 2007.
- Analysts’ consensus earnings estimates for 2012 have fallen 7% versus their peak and appear likely to decline further.
- Additionally, maxim ium tax rates on dividend income are set to almost triple, from 15.0% currently to 43.4%
Equity Bullish Factors
- Factors arguing in favour of equities include: (i) negative real interest rates, six central banks’ coordinated liquidity provision to funding markets, the Long-Term Refinancing Operation by the European Central Bank, and possible further monetary stimulus in the US; (ii) continued GDP growth in emerging Asia and Latin America; and (iii) policy easing and a likely soft landing in China (Morgan Stanley continues to estimate real GDP growth of 9.2% in 2011, 9.0% in 2012, and 8.6% in 2013).
- As of Apr. 20, the consensus of analysts’ forecasts for S&P 500 calendar-year earnings per share growth is 14.7% for 2011, 8.4% for 2012, and 12.4% for 2013, according to Thomson Reuters.
- Recent leading economic indicators, retail sales, inventories, consumer credit, foreign trade, business fixed investment, factory output, motor vehicle sales, consumer confidence readings, personal consumption, homebuilders’ sentiment, regional manufacturing and ISM manufacturing and non-manufacturing data still reflect continued expansion.
- Producer and consumer price inflation rates remain at low levels and deflation risks have faded.
- Equity 12-month forward price/earnings ratios are not excessive and the earnings yield (the inverse of the P/E ratio) is at very high levels relative to Baa corporate bond yields.
- High US corporate cash levels, which enable increased dividend payouts, stock buybacks, and mergers and acquisitions activity.
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