The $1 trillion erased from U.S. equities in May has left bulls from Byron Wien to Laszlo Birinyi and Jonathan Golub unbowed in their predictions that the rally in shares will continue.
Blackstone Group LP’s Wien, who foresaw the bear market’s end in 2009, said the Standard & Poor’s 500 Index’s biggest monthly retreat since September lowered investment sentiment so much that it’s safe to buy.
Birinyi, president of Birinyi Associates Inc., and Golub, the chief U.S. market strategist at UBS AG, say the largest first-quarter rally in 14 years left shares due for a decline and that gains will resume.
For a third straight year, losses in May have heightened concern that the slowest U.S. recovery from any recession in seven decades is fizzling out.
While the 6.3 percent decrease in the S&P 500 was enough for Birinyi to say he’s “tempering” his enthusiasm, Wien said declining forecasts for economic growth have aligned investor expectations with reality and more disappointments are unlikely.
“The best time to buy stocks is when people hate them and they sure hate them now,” said Wien, the New York-based vice chairman of the advisory services unit at Blackstone whose forecast that the S&P 500 would exceed 1,400 in 2012 came true on March 15. Blackstone has $190 billion under management. “Who would’ve thought that 2 percent growth would be impressive? But that’s what we have. Everybody’s bearish.”
Stocks rose last week, with the S&P 500 climbing 3.7 percent to 1,325.66, after China cut interest rates and European Central Bank President Mario Draghi said officials stand ready to act should the region’s growth outlook worsen. The increase trimmed the loss since the U.S. equity index reached its 2012 peak on April 2 to 6.6 percent. The gauge is up 5.4 percent for the year and 96 percent since reaching a 12-year low of 676.53 in March 2009.
Economists have pared 2012 forecasts for expansion in U.S. gross domestic product since last year. The world’s largest economy will grow 2.2 percent, down from an estimate of 3.3 percent in February 2011, according to the median estimate of 93 economists surveyed by Bloomberg.
Wien, a senior strategist for Morgan Stanley and hedge fund Pequot Capital Management Inc. before coming to the world’s biggest private equity firm, said the May selloff left investors with cash that will eventually come back to stocks.
Investors withdrew $7.2 billion from American equity mutual funds during the five days ended May 23 after $178 billion of outflows in the previous 12 months, data from the Investment Company Institute in Washington show.
Birinyi, an equities trader at Salomon Brothers Inc. in the 1980s, recommended buying shares at the beginning of May, saying rising bearishness was a sign they’d go higher. The 6.3 percent loss in the S&P 500 last month was the biggest decrease since September. He said in December 2008 that a bull market was beginning. An investor who bought the S&P 500 at the March 2009 low turned $10,000 into $20,984, including dividends.
“It ain’t over,” Birinyi said in a phone interview on June 7 from Westport, Connecticut. “Historically, in the last stage of the bull market it’s a very strong rally. The last stage is the one where everyone is in the pool. This is still a market where even in the first quarter of this year, there was a lot of skepticism and reluctance and that hasn’t changed.”
Birinyi added Whirlpool Corp., the world’s largest appliance maker, to his recommendations last month. The Benton Harbor, Michigan-based company is up 28 percent so far in 2012, even after dropping 17 percent in April, and analysts project earnings excluding some items will more than triple this year. Nike Inc. and Chipotle Mexican Grill Inc., which have outperformed the S&P 500 in 2012, are among his picks.
First-quarter profit that topped forecasts failed to help shares of Marathon Petroleum Corp. The Findlay, Ohio-based oil refiner declined 13 percent in May, the biggest monthly loss since September, even after reporting quarterly earnings that exceeded estimates by 29 percent on May 1.
UBS’s Golub expects the S&P 500 to reach 1,475 by the end of the year as earnings climb to $105 a share. His price estimate for the S&P 500 is tied for second-highest among 13 Wall Street strategists tracked by Bloomberg. While a default in Europe would force him to lower his forecasts, Golub said economic conditions in the U.S. are strong and European leaders will stem the crisis.
“The question is whether policy officials are going to watch the euro crumble or whether they’re going to take some type of action to avoid the worst-case outcome,” Golub said in a June 4 interview at Bloomberg’s headquarters in New York. “If there’s anything we’ve learned over the last three years, it’s that policy makers are much more able and creative at being able to avoid worst-case outcomes.”
Spain became the fourth euro member to seek a bailout since the start of the region’s debt crisis more than two years ago with a request for as much as 100 billion euros ($125 billion) to rescue its banks.
Both Golub and Tony Dwyer at Canaccord Genuity Securities LLC recommend technology and consumer discretionary companies. Broadcom Corp., a maker of chips that help mobile devices connect to the Internet, has lost 13 percent from its high this year of $39.30, sending the Irvine, California-based company’s price-earnings ratio 63 percent below its five-year average.
Ralph Lauren Corp. tumbled 14 percent last month even after the retailer reported profit that beat analysts’ estimates. Analysts project earnings will climb 16 percent in fiscal 2013. The stock is down 2.5 percent in June.
“Corrections are only natural, normal and healthy until they happen,” said Dwyer, the chief equity strategist at Canaccord, who predicts the S&P 500 will reach 1,575. “The fundamental backdrop is still constructive, albeit slower.”
Dwyer sees record S&P 500 earnings of $105 a share in 2012 and a price-earnings ratio of 15, compared with 13.4 now. With producer prices excluding food and energy rising an average of 2.9 percent this year, expenses are unlikely to curb profits and the ratio may expand more than that, he said. Dwyer predicted in July 2009 the S&P 500 would be above 1,060 by the end of the year. The measure closed at 1,115.10 in 2009.
“Given the sub-3 percent core inflation environment, a 15 multiple is the minimum not even the average,” Dwyer said from New York. “As long as you don’t go into a recession, $105 is very doable.”
The 9.9 percent slide from April 2 through June 1 is probably ending, according to Birinyi, who said the increased bearishness is “encouraging” and recommends investors stay in equities or start buying them before the last phase of the bull market starts around September. Of the 108 S&P 500 companies that had analyst changes in the past week, 64 percent had their ratings lowered, data compiled by Bloomberg show.
Financial markets have been battered by elections in Greece and France, concerns over Spanish banking, weakening emerging market economies such as China, India and Brazil and the 29 percent plunge in Facebook Inc. stock following the biggest technology initial public offering, according to Birinyi. That the S&P 500 has fallen just 10 percent is encouraging, he said.
“I did not anticipate that all the wheels would come off the bus,” Birinyi said. “Even now, it’s not the thickest ice I’ve ever seen. But we’re not giving up on the market.”
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