Solid stock gains forecast

The New York TimesJanuary 4, 2014 

After a banner year for stocks and a rocky one for bonds, market forecasters are remarkably consistent in their forecasts for 2014: more of the same.

Most forecasters are warning stock investors not to expect another year of 30 percent gains, as there was in the Standard & Poor’s 500-stock index in 2013. (The average forecast is for a 6 percent rise in the S&P 500, according to Bloomberg.) But the two analysts I selected for this column – Abby Joseph Cohen of Goldman Sachs and Bill Miller of Legg Mason, both of whom were remarkably accurate about 2013 – said another year of strong double-digit gains would not shock them.

“We could easily see gains of more than 20 percent” in stocks, Miller said. “And the market wouldn’t be overpriced at that level.”

In the many years I’ve been surveying experts for their predictions for the coming year, I cannot recall another time when optimism about the stock market, the economy and corporate profits was so widespread.

As is pessimism about the bond market.

The stock market’s relentless rise last year seems to have tamed all but a few perma-bears. When the Federal Reserve said in September that the economy was too weak for the central bank to taper its purchase of securities, stocks went up. And when the Fed said in December that it would begin to taper – stocks still went up.

The only thing that seemed to stop stocks’ inexorable rise was Congress’ self-destructive gridlock, and even that didn’t last long.

Still, such unanimity may be the most worrisome portent for 2014. As Karl Case, emeritus professor of economics at Wellesley College and a co-founder of the S&P/Case-Shiller index of housing prices, put it, “When everyone expects something to happen, that’s when it doesn’t.”

But neither he nor anyone else I consulted this year was willing to break ranks with the consensus.

“It gives me pause” said Cohen, senior investment strategist for Goldman Sachs and president of the Global Markets Institute, referring to the bullish herd mentality that has gripped Wall Street. “But there’s no reason to be a contrarian just for the sake of being contrarian. I look at the fundamentals. Even after such a strong year in 2013, I think it will continue.”

Cohen was almost exactly right a year ago, when she predicted that the S&P 500 would end 2013 at 1,787. (It closed at 1,848.) At the time, her forecast seemed wildly bullish, especially since stocks were at near record levels and had registered gains four years running.

“There was a significant mispricing of assets a year ago,” she said, referring to both stock prices (too low) and bonds (inflated).

That’s not as obvious now that stocks have gained.

“There’s something artificial about current asset prices,” she said, “which have been largely driven by liquidity. But we’ve begun a transition to valuations that are driven by fundamentals.”

And those, she said, are strong. She cited an expanding U.S. economy, higher job creation, gains in labor productivity, lower energy prices and subdued inflation.

“This will provide staying power,” she said.

Miller cited many of the same economic fundamentals as Cohen. At the same time, he saw little danger on the horizon.

“Recession? An oil price spike? Sudden tightening by the Fed? I don’t see any of that,” he said. “The path of least resistance is for the market to go higher.”

And he, too, wouldn’t be surprised to see the market’s price-to-earnings ratio expand, driving up prices.

“Historically, in the late stages of a bull market, stocks reach very high multiples, in the range of 20 to 22,” he said.

“There’s really no catalyst for a down market,” he said.

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