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With so many cyclical and secular issues and headwinds to growth and a widening gap between the operating and financial health of large businesses vis-a-vis small businesses and the consumer, I remain of the view that the market's reward currently doesn't justify the current risk.
Nevertheless, stocks are not meaningfully overvalued -- just a bit so.
While I have argued that stocks, unlike other assets classes (fixed income, private equity, residential and nonresidential real estate and commodities), have not had their valuation stretched, that most expect a relatively shallow economic recovery, that inflation and inflationary expectations are subdued and that the curse on cash will be intact for most of 2010, a wide range of malignant economic outcomes should continue to weigh on the U.S. stock market.
There is a growing degree of complacency and belief that in the spring of 2009 the domestic economy began a normal cyclical expansion capable of matching past recoveries of over 40 months in duration. I strongly disagree with this conclusion as the past cycle was not a traditional cycle. Rather it was an unprecedented credit-driven cycle characterized by the excessive and abusive use of debt/leverage. So, the following the halcyon cycle, the current expansion, which is deprived of much of the steroids that built that growth, seems likely to disappoint an increasingly confident cabal of forecasters of smooth and self-sustaining progress.
As discussed in Tuesday's opening missive, my baseline expectations are unchanged:
- Markets will have a limited memory from day to day this year, frustrating for long-term investors but a great backdrop for opportunistic traders who are willing to buy the dips and sell the rips.
- I continue to believe that the U.S. stock market will show little movement during the first quarter.
- For the full year, the major market indices will likely exhibit a high-single-digit loss (down 5% to 10%).
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