Top Gun FP Client Note: A Bullish Consensus For 2011

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NOTE: Every week I write a Client Note for my clients.  For a limited time, I am allowing non-clients to sign up and receive the Client Note.  You can sign up at the top right hand corner of the website.  I will also be posting the notes on my blog with a time delay from time to time.  Here is this week’s.

The Dow Jones Industrial Average kicked off December with a 356-point rally in two days and has not looked back.  The pace of gains since then has certainly slowed but …. stocks continue to coast higher.

– Michael Kahn, “As Stocks Rise, So Does Risk”, Getting Technical, December 22

Five Wall Street heavyweights say it’s time for individual investors to shun the perceived safety of bonds — and get over their fear of the U.S. stock market — so they can take advantage of what they predict will be a third straight year of solid gains for stocks in 2011.

– Adam Shell, “Experts Agree: Get Over Your Fear And Get Back Into Stocks”, USA Today, December 18

The recovery in 2011 will be strong enough for us to see sustained job creation that will finally give Americans a tangible sense of an improving economy.

– Phillip Swagel, Chief Economist in the Treasury Department during George W. Bush’s presidency and now a Professor at The University of Maryland, quoted in “Experts Citing Rising Hopes For Recovery”, The New York Times, December 24, A1

Stocks have indeed continued to coast higher since I wrote my last Client Note two weeks ago (“Top Gun FP Client Note: Going With The Flow Into Year End”, Top Gun Financial, December 10).  The S&P has added another 13 points to 1257 and is essentially trading at two-year highs.
There has been some good news – most importantly the two year extension of the Bush tax cuts (see “Congress Passes Tax Deal”, The Wall Street Journal, December 17, A1) – but, in my opinion, stocks have drifted higher mostly as a result of the good spirit on Wall Street at the end of a profitable year.
The positive market action has engendered a bullish reverie and belief that the economy is turning the corner. 
Bullish sentiment in the weekly American Association of Individual Investor’s survey reached 63.3% last week – the highest level of optimism since November 18, 2004.  Bearish sentiment fell to 16.4% – the lowest level since July 14, 2005 (“Bullish Sentiment At Six-Year High”, Charles Rotblut, Intelligent Investing Blog, Forbes, December 23).  The Investor’s Intelligence survey – another measure of sentiment – registered 58.8% bulls – the highest since October 2007 (“‘Santa Rally’ Might Ho Ho Ho Right Into January”, Reuters, December 26).
To go along with the rising bullishness, strategists and economists are increasing their forecasts for 2011. 
A couple Saturday’s ago, USA Today ran a headline article featuring interviews with five leading Wall Street strategists: David Bianco, Chief Equity Strategist, Bank of America-Merrill Lynch; Dan Chung, CEO and Chief Investment Officer, Alger Funds; Abby Joseph Cohen, Senior Investment Strategist, Goldman Sachs; Bob Doll, Chief Equity Strategist, Blackrock; Richard Bernstein, CEO and Chief Investment Officer, Richard Bernstein Advisors (Adam Shell, “Experts Agree: Get Over Your Fear And Get Back Into Stocks”, USA Today, December 18).  If you click on the link, in addition to the article you can listen to short 1-2 minute interviews with each of the strategists.  All five are quite bullish on the stock market for 2011, calling for double digit gains.
Goldman’s year end target for the S&P 500 is 1450.  David Kostin, Goldman’s Chief US Investment Strategist, made the case on CNBC three weeks ago (“Goldman Bullish On Stocks In 2011, Targets S&P 1450”, Top Gun Financial, December 12).
Barry Knapp, Barclay’s Head of Equity Strategy, has a 1420 year end target and justified it to Bloomberg two weeks ago this way: “Your new normal may not be quite so new.  There’s nothing to worry about with earnings. We’ll get some margin expansion, and we’re still at a pretty good stage in the economic cycle.  From my perspective, I’ve tried to think about all the risks.  I just think the outlook is favorable, so favorable that I struggle to see how the equity market doesn’t perform well” (“No New Normal As Strategists Predict 11% S&P 500 Gain In 2011”, Bloomberg, December 13).
Brian Belski, Chief Investment Strategist at Oppenheimer, commented on the contrast in sentiment compared to last year at this time: “Our recent client conversations have taken the proverbial 180.  We now find ourselves defending a less optimistic 2011 market outlook” (quoted in “Why Investor Optimism May Be A Red Flag”, Paul Lim, The New York Times, December 26, B5).
On Friday, The New York Times ran a front page article on the growing optimism for 2011 among professional economists.  Goldman Sachs and Morgan Stanley are both forecasting 4% GDP growth in 2011 (“Experts Citing Rising Hopes For Recovery”, The New York Times, December 24, A1).
It is amazing how quickly market sentiment shifts.  Where were all the bulls in November?  How much of this optimism is the result of December’s 6.5% rally?  And what are we to make of December’s rally?
Is the December rally signalling that the economy is turning a corner and 2011 will be a strong year?  Or is it the result of Wall Street propping up the market as best it can through year end in order to fatten its bonuses?
Historically, December is one of the best months for the stock market.  My guess is that this is even more true in recent years with much of Wall Street (i.e. hedge funds) compensated on a performance basis.  In fact, there have been January corrections in each of the last three years – and December rallies in 2006, 2008, 2009 and 2010.  There is a tacit understanding among the big institutions who dominate the market to support it in December to their mutual advantage.
For this reason, my personal view is that January will be a much better barometer of what we can expect in 2011.
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Greg Feirman
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Top Gun Financial (
A Registered Investment Advisor
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Granite Bay, CA 95746
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