FEATURE
Hello, 9000! The Dow's Run Is Far From Over
By ANDREW BARY
Clearing the 9000 Mark.
STOCKS HAVE ROARED BACK FROM THEIR March lows, highlighted by the Dow Jones Industrial Average's move above 9000 last week, and there is reason to believe another 10% gain is possible during the rest of 2009.
The U.S. economy is likely to expand in the current quarter for the first time in a year. Economies in Asia and much of the developing world are healing, and corporate profits have bottomed. Monetary policy is highly accommodative in most developed nations. The corporate bond market has had a huge rally, with investment-grade debt spreads narrowing to where they stood just before last fall's Lehman Brothers bankruptcy.
All major U.S. market indexes -- and major foreign bourses -- now are solidly in the black in 2009. The Dow, at 9093, is up 3.6%, while the S&P 500, at 979, has risen 8.4%. The Nasdaq has starred, rising 24.7% this year, to 1966, boosted by sharp increases in tech stocks such as Apple (ticker: APPL), Intel (INTC), Oracle (ORCL) and Cisco Systems (CSCO). The Dow has been held back by year-to-date declines in such blue chips as ExxonMobil (XOM), General Electric (GE), Chevron (CVX), Procter & Gamble (PG) and Wal-Mart Stores (WMT).
Barron's was bullish on stocks in a cover story at the March low, citing a host of historical valuation measures ("Ouch, That Hurt, March 9"). We remain optimistic.
The S&P 500 may not be cheap, based on projected 2009 operating earnings of $55. But it looks attractive based on estimated 2010 net of $75. Its P/E of 13 times 2010 earnings is reasonable by historical standards, especially given the low 3% to 4% yields on longer-term Treasuries and near-zero yields on money-market mutual funds. While the S&P 500 is up 44% from its March 9 low, it still is below where it stood 10 years ago. A lost decade for stocks, it bodes well for the next 10 years.
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The risks today include a possible economic "double-dip" and resulting profit disappointments, the threat of higher taxes and the danger of greater inflation resulting from the Fed's super-easy monetary policy.
But several Wall Street strategists have boosted their S&P 500 price targets. Goldman Sachs' David Kostin now says that the index could hit 1060, about 8% above its current level. He previously had a 940 target.
Says Byron Wien, the chief investment strategist at Pequot Capital Management in New York: "The economic recovery should gain momentum later this year, partly due to the impact of the federal stimulus program, and justify the move that has been made in the stock market so far."
Wien's year-end S&P price target of 1200 looked hopeless earlier this year. It still may be too optimistic, though he thinks the S&P easily could top 1000. He notes that 75% of the companies in the index have beaten second-quarter profit expectations.
Warren Buffett told CNBC Friday that investors shouldn't be surprised by the rally in the face of a recession and a 9.5% jobless rate, because that's what stocks historically do.
WHILE ALTERNATIVE INVESTMENTS, like private equity, commodities and timber, did well in the past decade, the next 10 years might belong to blue-chip U.S. stocks. Top techs like Cisco, Oracle and Microsoft (MSFT) trade at or for less than 15 times estimated 2010 profits. The same holds for major consumer staples -- Procter & Gamble , Coca-Cola (KO) and PepsiCo , (PEP) -- and they often have safe dividend yields of 3% or more. Drug stocks fetch just 10 times projected 2009 earnings, with Merck (MRK) and Ely Lilly (LLY) sporting yields of 5% or higher.
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Groups considered "offensive," like tech, industrials and basic materials, have starred in 2009, while historically "defensive" sectors, such as electric utilities, consumer staples, health care, drugs and telecom, have been laggards. Financials are about flat in 2009, but that masks enormous volatility -- a roughly 50% drop from Jan. 1 to March 9 and a 100% recovery since then.
Valuations of some offensive stocks now look stretched, based on 2009 or '10 profits. Investors are looking out to 2011 or 2012 earnings to justify current prices and future hopes for companies such as industrial bellwether Caterpillar (CAT), which last week rallied on encouraging second-quarter profits. In contrast, the defensive groups command just 10 to 12 times this year's expected profits.
But while sector rotation is likely in coming months, the overall stock market should keep moving in the same direction it's traveled since March.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
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