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Why Is Wall Street So Bullish After Such a Weak Year?

CNBC.com

After a year in which the Standard & Poor’s 500 finished almost exactly flat for the year and with a slew of headwinds lurking, stock market strategists could be excused for sounding a bit pessimistic for the year ahead.

No worries, though: Wall Street is just as optimistic as ever that it can somehow fight its way out of its year-long (indeed, decade-long) doldrums and pull off a big gain in the next 12 months.

A pair of press briefings Wednesday showed vividly that market pros continue to favor the sunny side of the Street.

Take, for instance, Binky Chadha, chief U.S. equity strategist at Deutsche Bank.

Chadha is fresh off making what TheStreet.com recently dubbed the “biggest S&P 500 blown call of 2011”—an audacious and stunningly wrong prediction last year that the index would finish the year at an eye-popping 1550.

So he missed by nearly 25 percent? So what?

There was Chadha, telling reporters that the S&P 500 would finish this year at a somewhat subdued 1500—about 18 percent from the current trading level and nearing bull market territory.

Trust him, he has his reasons.

“The theme basically is equities are very cheap. We would argue that there is also a lot of risk,” Chadha said. “The question is, how do you play the value versus the risk?”

The answer, he suggested, was easy: Buy, buy, buy, despite what all the naysayers profess. He broke his beliefs down into seven themes:

1) Worried about the future? Don’t be sucked in by the “extreme negativity” which is at levels seen only three times in history.

2) M&A is on the way (we’ll give him this one).

3) Dividends are rising, so why not buy?

4) Stock buybacks are rising (hmmm…not really…they actually fell by $218 million in December).

5) the U.S. is not (bank on it) going into recession.

6) Europe isn’t really as bad as it looks.

7) the U.S. presidential election will be good for stocks since the Republicans likely will take full control of Congress and, after all, it doesn’t really matter to Wall Street who is president.

Chadha’s predictions were backed up in full throat by Deutsche’s chief economist, Joe LaVorgna, who sees U.S. gross domestic product gaining 4.3 percent in the fourth quarter of 2011 and unemployment falling below 8 percent in 2012.

“The consumer’s got more sustainability than people believe,” LaVorgna said.

Uptown a ways, strategists at Prudential Financial gathered to deliver a bullish but decidedly more subdued forecast.

Ed Keon, Prudential’s quantitative management managing director, said the market should chart some gains, though in “an unusually perilous time.”

John Praveeen, chief investment strategist, predicted global stocks to “eke out” some gains, while chief market strategist Quincy Krosby sees a year of “risky business” where investors had better hedge heavily in a market where “you cannot afford to be in and you cannot afford to be out.”

So after a year when virtually every equity strategist overshot the market, some by a wide margin, who should investors believe?

Judging by recent behavior, they are more inclined to act on their own.

In December, bond and bond fund allocations hit their highest levels since November 2010, according to the American Association of Individual Investors. Investors yanked $131.8 billion from stock mutual funds in 2011, said Nick Colas, chief market strategist at ConvergEx.

Sam Stovall, chief equity strategist at S&P, advised clients this week to buy simply because the flat preceding year indicates that the market has nowhere to go but up. That’s a strategy that has served investors poorly, particularly over the past decade, but it’s a popular market meme these days.

Yet average investors remain unconvinced. Portfolio allocations average just 56.1 percent for stocks, below the historical norm of 60 percent, and the level of AAII bullishness is just a net 10 percentage points higher than the bears.

Still, the Wall Street chant of better days ahead for stocks remains.

In a word, it’s all about hope.

“During the first quarter of this year, it will likely become obvious whether fallout from Europe will end the U.S. and global economic recoveries or whether recent evidence of U.S. economic acceleration is for real,” Jim Pauslen, chief market strategist at Wells Capital Management, said in a note to clients. “And, if the U.S. economy continues to persevere, rising confidence in the economy and in the financial markets should increasingly prove a dominant theme for the year.”

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