Investors face a profitable if volatile year ahead as stocks and bonds outpace a sluggish economy, experts at Prudential Financial said Tuesday.
US stocks will post gains matching 2009's massive surge while global equities could perform even better, the firm said during a panel discussion in New York. Bond investors may have to be more selective but could see opportunities in corporates and Treasurys, according to the panel.
Overall, investors will have to adjust to a different environment than last year, when stocks bounced off generational lows and now will look for firmer footing ahead.
"The easy money has been made," general market strategist Quincy Krosby said. "We may see a peak in the market, a liquidity-driven rally. I think it will transition to a market much more based on fundamentals."
Prudential is one of the biggest asset managers, with $641 billion under managment, and its outlook is widely followed in the financial industry. Prudential's experts delivered an overview on where the firm sees various asset classes headed:
While Prudential's analysts are not unanimous on how strong of a rally they see, they are in agreement that stocks should plow higher even as gross domestic product grows at a pace of 2.5 to 3 percent.
"Most of us don't realize the fact that the markets can go one way and the economy can go the other way," Krosby said. "Bull markets are born on bad news and die on good news."
Ironically, Krosby said investors should hope there's "enough bad news in the market to keep the cyclical bull market going for some time." Analysts generally feel that too much positive sentiment can hurt a market by pushing stock prices too high and setting up a correction.
One area in particular investors should follow is the dollar, she said. Much of the stock gains in 2009 were predicated on a weak US currency, something that Krosby said will have to change at some point.
As for strategy, Krosby said investors should be "completely diversified across the board in all asset classes."
While US stock gains could replicate 2009's gain of 23 percent for the Standard & Poor's 500, emerging markets and some developed countries could eclipse even those lofty totals, according to Prudential's estimates.
John Praveen, managing director and chief investment strategist, was the most bullish of the firm's analysts.
"We still think that emerging markets and Europe will continue to outperform the US and Japan," he said. "The US itself should continue to enjoy gains," which he said should approach 20 percent.
Praveen called for a "Nike" recovery, referring to the athletic shoemaker's trademark "swoosh" symbol—meaning he sees slow, steady growth for the world economy.
"Global markets we believe will continue to enjoy the macro sweet spot of gradual, steady, sustained GDP growth," he said. He predicted China will grow at more than 10 percent, India at 8 percent and Brazil and Russia at 5 percent, while the world will see a total GDP growth of about 6 percent.
For global stocks, Praveen recommends industrials, materials, technology and financials.
While some market watchers refer to the past 10 years as as lost decade for stocks, the same could not be said for bonds, which sizzled through the 2000-09 as investors shed risk and put money into debt.
While such returns would be hard to duplicate, that doesn't mean 2010 won't also present bond opportunities. They may not, however, be as easy to spot.
"The outlook is actually very good for the bond markets," said Robert Tipp, managing director of fixed income and bond strategist for Prudential. "The price is right and there are a lot of very favorable issues in support of the bond market."
Among the factors working in favor of the market are the Federal Reserve's need to raise rates but only gradually, coinciding with the continued influx of Treasury debt onto the market and the Fed's exit as a buyer.
Tipp's position in favor of Treasurys is contrary to much of the conventional wisdom for 2010, but he said investors who have sat on the sidelines will be looking for fixed income with relatively low risk but with higher yields than the money markets.
"In general it should be a good year for fixed income," he said.
Mortgage-backed bonds and certain investment-grade corporates are likely to be the worst performers, he added. High-yield corporates led the 2009 bond market.
Investors face several landmines in the coming years that could derail a continued stocks rally, such as another leg down in the financial crisis, a stumble in the real estate recovery or the grim reality of more job losses.
Overall, though, Prudential has gone from being "nervously bullish" to the precipice of "outright bullish," said Ed Keon, managing director and portfolio manager for quantitative management.
How strongly that sentiment grows over the next 10 years will depend on how well the market can avoid those landmines, he said.
"Valuations on the US stock market today are not especially attractive anymore," Keon said, expanding on the theme that the bargain hunting is over. "They're not dirt-cheap."
As such investors will have to get used to a climate where it isn't as easy to find cheap stocks and instead will have to look at those companies that protect principal while providing solid, if less spectacular, gains.
"My guess is that the focus in investment management over the next several years will shift from total returns to beating a benchmark," Keon said. "For the average investor it will be much more important to control the risk that he faces."