Stock Market Return Predictions: What the Current Economic Indicators Call for 2010

Sam Subramanian PhD, MBA

A year ago, things looked grim. Collapse of the global financial system threatened to push the world economy into a depression.

Central banks around the world responded with near-zero interest rates, rapid money supply expansion, and gargantuan fiscal stimulus.

These measures have worked and the US gross domestic product (GDP) expanded 2.2% in the third quarter after contracting for four straight quarters.

US GDP's 2.2% expansion in the third quarter represents the best showing in almost two years.

Anticipating economy recovery, the S&P 500 index (SPX) rallied 65% after bottoming in March. This enabled this widely followed US stock market benchmark to close the year with a 26% gain. (The Russell 2000 index (RUT) small-cap proxy ended 2009 with a 27% gain.)

The S&P 500 index ended 2009 at 1115.10. This US stock market benchmark sits 29% below its all-time high set on Oct. 9, 2007.

While stock prices are already up significantly from the 2009 bottom, the S&P 500 would have to gain another 40% to climb back to its all-time high.

How is the stock market likely to fare in 2010? Is it likely to set new all-time highs or break below 2009 lows?

The 'nay-sayers' often cite sub-par growth, unemployment, and inflation as bogeys that can derail the rally.

Here are the facts ...

Index of Leading Economic Indicators

The Conference Board's index of leading economic indicators is up for eight straight months. The 7% advance in the LEI in the past 6-months is most impressive from a historical perspective and does not suggest a sub-par recovery.

The Conference Board's leading index of economic indicators ... up, up, and away.

Unemployment Rate

The US unemployment rate has increased rapidly through the recession exceeding 10% for the first time since 1983. The rate of increase in unemployment is showing signs of moderating.

The US unemployment rate finally showing signs of peaking.

Unemployment Claims

As a leading job market indicator, the trend in unemployment insurance claims is encouraging. After peaking at the end of June, unemployment insurance claims have declined by 28%, as rate of firings has declined.

The decline in unemployment claims bodes well for the job market.

Consumer Price Index

The deep recession caused demand to shrink rapidly and inflation was hardly an issue through most of 2009. The consumer price index (CPI) declined year-over-year through October. The consumer price index has ticked up in recent months and continuing rapid increases in inflation can become problematic.

Year-over-change in the consumer price index has turned positive ... uncontrolled increases in the CPI can be a bogey.

Stock Market Return Predictions for 2010

2010 promises to be a year when the economic recovery begins to gain traction. After slumping for nine straight quarters, profits at S&P 500 companies are forecasted to increase in the fourth quarter of 2009 and at least 19% in each of the first three periods of 2010. Among companies in the S&P 500, Discover Financial Services (DFS), DIRECTV Group (DTV), SLM Corp. (SLM), and JPMorgan Chase (JPM) are expected to grow EPS by nearly 50% or more.

Corporate takeovers have perked up and are likely to gain further momentum in 2010. This too can have a positive influence on stock prices.

Offsetting these pluses, the stock market may have to contend with rising inflation and interest rates.

On balance, I think the S&P 500 can gain 10% to 15% in the second year of this bull cycle. That said, investors can reap richer rewards by targeting specific sectors.

In 2009, technology was the best performing sector with the Technology Select Sector SPDR (XLK) gaining 51%. Utilities lagged with Utilities Select Sector SPDR (XLU) advancing just 12%. None of the 9 Select Sector SPDRs ETFs that are formed from the S&P 500 lost ground in 2009.

While 2010 is likely to be similar to 2009 on one count, it is likely to be different on another. I expect the best and worst performing sector to differ in returns by a sizeable magnitude akin to the 40% that separated XLK and XLU in 2009.

However, the market environment is likely to be less forgiving in 2010. And certain companies like First Solar (FSLR), Humana (HUM), and Plum Creek Timber (PCL) may not enthuse investors if their EPS declines double-digits as analysts' expect. As such, 2010's worst performing sector may well lose ground.

In all though, 2010 is likely to be a good year for the stock market and having money invested in stocks can add to wealth.

Internal Sponsorship

Give Your Portfolio A Great New Look!

In 2009, AlphaProfit premium service users scored gains from selections like FSAVX, up 122%, MINDX, up 97%, XRT, up 77%, and YACKX, up 59%. Our latest recommendations of mutual funds and ETFs are now available. Refurbish your investments today. Subscribe to AlphaProfit Newsletter now!

Popular How-To Guides Secrets to Boosting Your No Load Mutual Fund Returns Rollover IRA: A Booster Rocket for 401k Retirement Plans Best ETFs to Build Your ETF Portfolio Constructing a Top Mutual Fund Portfolio Selecting Stodgy Stocks to Grow Your Portfolio Diversified Portfolios with a Knock-Out Punch Select Sector SPDRs: Maximize Return and Minimize Risk A Guide to Analyzing Mutual Fund Returns Looking at Mutual Fund Fees the Right Way Inside Scoop on Morningstar Fiduciary Grades Are PowerShares ETFs Right for You? Custom Search

Recent MoneyMatters Articles Fidelity Enters the Alternative Energy Fray with FSLEX Best Way to Invest in Energy Stocks Sector Funds: Best, Worst, and Mid-Year Market Outlook Choosing the Best Fidelity Money Market Funds Investing in Emerging Markets ETFs and Mutual Funds JAOSX - A Worthy International Mutual Fund? 3 Good Stocks to Buy When Correction Ends Has the Dow Jones Industrial Average Topped? ETFs: Best, Worst, and 2010 Forecast Stock Market Predictions for 2010 Fidelity Select Funds: Best, Worst, 2010 Forecast More from Investing Blog Sign Up for Free e-letter

About AlphaProfit MoneyMatters and AlphaProfit
AlphaProfit MoneyMatters is a free e-letter distributed to registered users of AlphaProfit's website. The e-letter analyzes the economy, markets, and sectors and provides money-making insights on stocks, exchange-traded funds, and mutual funds. AlphaProfit MoneyMatters is edited by Dr. Sam Subramanian acclaimed for his financial acumen and analytical skills.

AlphaProfit Investments, LLC is an independent investment research firm based in Sugar Land, TX. AlphaProfit publishes the AlphaProfit Sector Investor's Newsletter, edited by Dr. Sam Subramanian. Leveraging sector funds, the Newsletter provides high-performance model portfolios with Fidelity funds and exchange-traded funds. It also includes actionable stock recommendations. This newsletter features among MarketWatch's top 10 investment newsletters and has won the coveted #1 rank from Hulbert Financial several times.

Copyright Policy and Fair Use Guide
You are welcome to quote a short excerpt of the article not exceeding 100 words with attribution in the form of a hyperlink to the article's full URL or http://www.alphaprofit.com. If you wish to republish the article in full on your website, blog, or other media, you must obtain permission.

AlphaProfit MoneyMatters™ is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual advice on investing. Factual material is obtained from sources believed to be reliable and is provided without warranties of any kind. AlphaProfit Investments, LLC is not responsible for any errors or omissions. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from any of the investment companies, brokers or entities connected with the securities mentioned herein. Please review our Terms and Conditions of Use and Subscriber Agreement which is available on our website at www.alphaprofit.com; they govern your relationship with AlphaProfit Investments, LLC, including, but not by way of limitation, use of the AlphaProfit MoneyMatters.

This page is best viewed in 1024 by 768 pixels screen resolution or higher.
Copyright © 2010 AlphaProfit Investments, LLC. All rights reserved.