Recent volatility and ongoing uncertainties have left several financial experts defensive or bearish about the stock market in the fourth quarter, while others remain more bullish about the slow-moving economic recovery.
Citing lower-than-expected economic growth in the first six months of 2011, Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co. Inc., is defensive about the second half of the year.
“Our forecast for the economy for the first six months was much too optimistic,” Bittles said. “I think the second half is going to be problematic.”
Bittles is not recommending clients sell all their stocks, but he is advising those 55 years and younger to move toward an asset allocation of 55 percent in stocks, with an emphasis on consumer staples. Thirty percent of assets should go to fixed income, such as AAA corporate bonds, and the rest should be cash, he said.
The recent economic turmoil is symptomatic of a larger change in sentiment from a borrow-and-spend to a save-and-invest attitude, Bittles said.
Economic policy will hopefully move in that direction and encourage a stock market recovery, he said.
“Borrow and spend is what got us into this fix, and we certainly can’t expect to spend our way out of this slow growth economy,” he said. “That deleveraging process will cause pain and slowdown in the economy as consumers pay less, but it’s a necessary prescription for a new bull market in the economy and the stock market in the years to come.”
More volatility
Financial and equity markets will remain volatile on a global scale in the fourth quarter and into 2012, said Andrew Busch, global currency and public policy strategist for BMO Capital Markets.
Upcoming votes about implementing a European financial stability facility and a new bailout package for Greece will keep investors uncertain, he said.
“Each time there’s a vote, the markets will be nervous about the outcome,” Busch said.
At home, political discussions about the nation’s debt ceiling, President Barack Obama’s jobs program and a possible stimulus by the Federal Reserve will create uncertainty in the fourth quarter, he said.
Because of the recent financial market volatility, Busch doesn’t expect the S&P 500 to surpass 1,250 in the fourth quarter. He also thinks consumer spending and corporate earnings forecasts will decrease.
“I expect more of a range to develop for the S&P 500 as analysts reduce their expectations for corporate earnings due to the downgrading of the U.S. economy for the second half of this year and into 2012,” he said.
Another bear
Investors can expect a choppy fourth quarter, said Bob Lapointe, vice president and chief compliance officer at Wauwatosa-based Jacobus Wealth Management Inc.
Lapointe has turned more cautious with clients’ portfolios, increasing the cash position to between 5 and 10 percent and concentrating on large, high dividend-paying domestic stocks while reducing international exposure.
While Lapointe is bearish on fourth quarter economic growth and thinks the second half of 2011 will be ugly, he does not expect another recession.
“Do I think we’ll hit a double dip? If you define that as two consecutive negative quarters, no,” he said.
Several event risks, both domestically and globally, will most likely keep uncertainty high, Lapointe said. Economic growth for the rest of the year and into 2012 will probably hover at or below 2 percent, but would need to reach 3 percent for significant recovery.
Consumer spending will remain flat as people pay down debt and resist purchasing anything but necessary goods, he said.
“People are hunkering down,” Lapointe said. “What they are buying is what they have to buy. I’m not looking for a very positive black Friday.”
Glass is half full
However, some experts are optimistic that the market is on the way back up for the fourth quarter.
While today’s worries seem all consuming, as investors look ahead to the new year and some issues are resolved, they will become more confident, according to Sara Walker, senior vice president and investment officer at Associated Wealth Management, a division of Green Bay-based Associated Bank. Investors also will get used to some of the weaknesses in the market, she said.
“Typically what we see is that when a new year starts, a lot of it has to do with the psychological change of moving into the new year and companies start the year with quite a bit of optimism,” she said.
Investors should continue to see strong earnings reports from corporate America, but at a slower growth rate, Walker said.
“We’ve had very strong earnings growth, and it hasn’t exactly contributed to strong stock market performance, so I believe we’ll continue to see decent earnings growth,” she said. “What will change the perception of that is just a better tone of investor confidence.”
Because of that rising investor confidence, Walker is bullish about the fourth quarter stock market.
Still bullish
Ken Evason, CEO and chief investment officer at Waukesha-based Windermere Wealth Advisors LLC, also is bullish about the fourth quarter.
Strong corporate balance sheets and stock buybacks, as well as rising dividend payouts for high quality companies have encouraged his attitude.
Uncertainties and upcoming political and economic events are already priced into stocks, he said.
Investors should embrace the fearful market and invest for the long term, concentrating on health care, technology and consumer discretionary stocks – particularly those leveraged to global emerging markets, Evason said.
“Equities have very strong and compelling valuations, good dividend payouts and don’t seem to have the risk of gold and U.S. Treasury bonds,” he said.
