Market Forecast: Bound and Bumpy
Scenario No. 3 -- Below-Consensus Economic Growth (probability goes from 30% to 35%): The U.S. experiences a disappointing sub-1.5% real GDP growth rate, and Europe experiences a medium-scale recession. S&P 500 profit forecasts for 2012 are cut back to $98 to $100 a share (only slightly above 2011's levels). Stocks, valued at 12.5x under this outcome, have 11% downside risk over the next nine months. S&P target is 1235.
Scenario No. 4 -- Muddle Through (probability goes from 60% to 65%): The U.S. muddles through, with 1.5%-2.0% real GDP growth, and the European economies suffer a modest (but contained) business downturn. S&P 500 profits for 2012 trend toward a range of $103-$105 a share as some margin slippage occurs. Stocks, valued at 13.75x under this outcome, have 3% upside over the next nine months. S&P target is 1430.
My base case of muddle through, with a 65% probability, yields an S&P 500 price target of 1430, 4% higher than S&P's current cash level (1370). Below-consensus economic growth, which is accorded about a one-third probability, yields an S&P target of 1235, which is well below both the current level of S&P cash of 1370 and my 1360 fair market value estimate.
While there could be overshoots, in all likelihood, I expect the S&P 500 to be contained within the upper range of these two likely outcomes of between 1235 and 1430 for the remainder of the year. My guess is that 1300-1430 represents a reasonable trading range for the balance of 2012. (Remember the 1235 target has been assigned only about a one-third probability, so I adjust my trading range higher.) This yields about 70 S&P points of risk from the current S&P cash index and only about 60 points to the upside, for an uninspiring risk/reward. (It should be noted, however, that in its extreme and not adjusting for the melded outcome probabilities, a much broader trading range (1235-1430) is represented, with a far more unattractive risk/reward ratio of nearly 135 S&P points down to only about 60 points up from Friday's closing S&P cash of 1370.)In terms of the economy, the domestic economy was not as strong as portrayed over the last six months. Fourth-quarter 2011 economic growth benefited disproportionately from an inventory build and the termination of the 100% tax credit for capital expenditures (which was reduced by half on Jan. 1, 2012). First-quarter 2012 activity was elevated by unseasonably warm weather that pulled forward and buoyed retail spending.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV