Market Insider

Strategists see bull running on, but look at their track record

Long-time bulls nervous

Stocks enter the seventh year of the bull market Tuesday with a roaring 207 percent gain, and strategists see more room to run.

Six years ago Monday, the S&P 500 hit a closing low of 676, after a brush with the frightening 666 level in the previous session. The index, at its trough, was down 57 percent from its October 2007 high.

It has since made up the ground it lost and broken into record territory, but the question is now whether those gains can continue, particularly as the Fed inches toward its first rate hike in coming months.

Stock market strategists are targeting a roughly 7.5 percent gain in the S&P 500 this year—in forecasts reported as of the end of 2014. Bespoke provided the 2015 estimate and also annual targets going back to the start of the current bull run, and it seems that the strategists got their year-end calls wrong by an average margin of 8.2 percent during those years.

Their worst performance was in 2013, when they expected a 7.4 percent gain, but got an increase of 29.6 percent, according to Bespoke and CNBC data. Of course, the dozen strategists can amend their forecasts as the year advances, and this analysis does not give them credit for changing their mind.

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Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

Interestingly in 2009, Wall Street was expecting a big year even as the financial crisis was in full swing. The strategists projected a 16.9 percent gain, but got a 23.5 percent increase instead. Their best year was 2010, when the average forecast missed 2.7 percent of the move, and the S&P 500 gained 12.8 percent.

Michael O'Rourke, chief market strategist at Jones Trading, said he does not publish an S&P target, since a year away is too much of an educated guess. "The market's going to do what it's going to do. As investors, you look for risk versus opportunity," he said.

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O'Rourke also points out that the earnings estimates used by the strategists to crunch their year-end numbers are based on earnings that he says are lower quality because of all the corporate share buyback programs.

Bank of America Merrill Lynch analysts track the behavior of strategists in their "sell side indicator" and see a contrarian call in their forecasts. Since the 1980s, they have done a monthly survey of key equity strategists, asking them what their equity allocation would be in a balanced fund.

Currently, the strategists have stocks at 51 percent—a bullish sign. "Traditionally by the textbook definition, the historical benchmark allocation is 60 to 65 percent equities," said Jill Carey Hall, BofAML equity strategist.

"When everyone is bearish, that's been a good contrarian indicator in terms of a buy signal," she said.

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The best year recently for that indicator was 2013, the very same year the strategists were wrong about oversized market gains. Hall said other indicators that year were not showing the same bullishness for stocks that showed up in the "sell side indicator."

For the near term, traders are focused on the Fed meeting next week, and whether the central bank will tweak its statement to show it is closer to raising rates. They mostly expect the Fed to signal a pending rate hike by removing the word "patience" from its statement, a precursor to a rate hike which economists mostly expect to be in June or September.

O'Rourke said Tuesday could be a relatively quiet market day, but things should heat up as next week approaches. "As you get closer to the event, the market should have started expressing a little more concern about it, especially if removing the word 'patient' is likely," he said.

What to watch

Tuesdays data includes the NFIB small-business report at 9 a.m. ET, and the JOLTs survey on job openings and turnover and wholesale trade, both at 10 a.m.

Earnings are expected from Barnes & Noble and Surgical Care Affiliates before the bell. American Eagle Outfitters, Analogic, VeriFone and Habit Restaurants report after the closing bell.

After unveiling its iWatch Monday, Apple meets shareholders at its annual meeting at noon EDT in Cupertino, California.