By Jeff Kleintop, Chief Market Strategist for LPL Financial
NEW YORK (
) -- The year 2010 is ending on a high note for investors. The economy hasshown signs of reaccelerating from the summer soft spot, the
has made new two-year highs, returning to the level that preceded theSeptember 2008 failure of Lehman Brothers, and President Obama signed intolaw an extension of all of the Bush tax cuts for two years, along with payrolltax cuts and expanded jobless benefits.
This past summer's "double-dip" fears among investors have faded. Thedouble-dippers pointed to the sharp decline in the leading economic indicatorsduring the summer as a sign that another recession was on the way andstocks were headed much lower. However, we often referred to the slowdownas just a "one-and-a-half dip" typical of a recovery.
Regular readers of LPL commentary will recall that we predicted the slowdown in theleading economic indicators and market pullback that began at the end of April(
When Leading Indicators Peak
, April 5) and the subsequent reboundin those indicators (
Time for Quiet Reflection
, July 6) and the stockmarket, as the S&P 500 made its low for the year at the beginning of July.
The stock market, measured by the S&P 500, has climbed all the way back tothe levels that preceded the event that triggered the financial crisis: the failureof Lehman Brothers in September 2008. At a two-year high, the S&P 500 isnow less than 20% below its Oct. 9, 2007 peak of 1565 -- the all-time high.
However, investor confidence is also on a high note, sounding an ominoustone. History tells us that when there are too many bulls, the market may bedue for a pullback. Investors are now the most bullish they have been since2004.
According to the widely watched American Association of IndividualInvestors, the percentage of investors who are bullish on U.S. equitiesincreased to 63.3% last week from 50.2% the previous week. Thosebearish on the stock market fell to just 16.4% -- the lowest percentagesince 2005. Bullish readings often correspond to near-term market peaks.
The last time the percentage of bulls was 55% or higher, it was October2007, when the market peaked. The recent stock market surge may be duefor a pause or modest profit-taking.
Looking out to next year, we see no stormy skies or bright sunshine for 2011;instead, we have a more "middle-of-the-road" forecast, composed of a mixof clouds and sun.
Recent years have seen extremes one way or the other.We see a 2011 that offers investors modest single-digit gains for stocks, low- tomid-single-digit gains for bonds, and an economy in the United States thatmuddles along at a 2.5% to 3% pace.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing may involve risk including loss of principal. The Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The American Association of Individual Investors (AAII) is a nonprofit organization with about 150,000 members whose purpose is to educate individual investors regarding stock market portfolios, financial planning, and retirement accounts. AAII assists individuals in becoming effective managers of their own assets through programs of education, information and research. The organization markets itself as an unbiased source of investment information because of its not-for-profit status. Leading Indicator: An economic indicator that changes before the economy has changed. Examples of leading indicators include production workweek, building permits, unemployment insurance claims, money supply, inventory changes, and stock prices. The Fed watches many of these indicators as it decides what to do about interest rates.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
Jeffrey is Chief Market Strategist and Executive Vice President at LPL Financial.