The biggest U.S. fund managers say the bull market in stocks should weather Europe's widening sovereign debt crisis even as it spurs the largest surge in volatility since the collapse of Lehman Brothers Holdings Inc.
While equities may post more losses as countries from Greece to Spain struggle to cut deficits, managers at Birinyi Associates Inc. and First Citizens BancShares Inc. say declines are a buying opportunity. The biggest one-day retreat since April 2009 has made American stocks more attractive by reducing valuations as the economy and corporate profits recover, said Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co.
“The fundamentals are intact,” said Stephen Wood, who helps manage $176 billion as chief market strategist for Russell Investments in New York. “This is going to be messy. It's going to be a grinding slog of an environment.”
The Dow Jones Industrial Average fell almost 1,000 points in intraday trading yesterday, the biggest decline since the 1987 crash. While the gauge trimmed its drop to close down 3.2 percent, speculators have boosted bets that stock-market volatility will remain wider than average. U.S. stock index futures were little changed at 8:35 a.m. London time.
Birinyi Associates, the research and money-management firm founded by Laszlo Birinyi, bought shares during the rout on speculation the losses were overdone. The firm reiterated its forecast for the Standard & Poor's 500 Index to climb 17 percent to 1,325 this year. The benchmark gauge for U.S. equities slid 3.2 percent to 1,128.15 percent yesterday.
“Almost all bull markets have a correction at some point and that point could be now,” said Jeff Rubin, the director of research at Birinyi Associates in Westport, Connecticut. “That doesn't change the outlook for the year.”
The S&P 500 has risen 18 percent on average in the 12 months following 15 collapses, scandals and bankruptcies since 1970, data compiled by Birinyi show. The index has fallen 7.3 percent since April 23
“The market was overbought, ahead of itself and due for a correction,” said Marc Faber, publisher of the Gloom, Boom & Doom report, in an interview yesterday.
While equity markets will be volatile for the next several months, First Citizens BancShares's Eric Teal said yesterday he's buying shares of U.S. industrial companies and commodity producers on speculation the S&P 500 will rebound and return about 10 percent for the year.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, climbed 32 percent yesterday to 32.80, the biggest gain since September 2008, when New York-based Lehman collapsed in the biggest bankruptcy ever. Futures on the VIX also increased, indicating traders are betting market swings will remain elevated. July futures rose 11 percent to 29.20 and September contracts gained 9.7 percent to 30.05.
“The move today and maybe in the near term is a good investment opportunity given the strong fundamentals in the U.S. market,” said Teal, who oversees $4.5 billion as chief investment officer at First Citizens in Raleigh, North Carolina. “For the first time in four or five years, we've favored U.S. equities over international equities.”
JPMorgan's Lee reiterated his forecast in a research note yesterday that the S&P 500 will rise 15 percent to end the year at 1,300. Lee, along with
Goldman Sachs Group Inc.'s David Kostin, was the most accurate equity strategist tracked by Bloomberg in predicting the market's gain in 2009. Both are based in New York.
Yesterday's slump left the S&P 500 valued at 13 times forecast profit for the next 12 months, according to data compiled by Bloomberg. That's about 30 percent below its 10-year average of 18.4.
To Bruce McCain, chief investment strategist at Cleveland- based Key Private Bank, turmoil in Europe may signal more declines for U.S. stocks. S&P cut the credit ratings of Greece, Portugal and Spain last week, and Moody's Investors Service said this week that it may downgrade Portugal.
“We're inclined to think this is a much deeper problem than has been fully discounted in the market so far,” said McCain, chief investment strategist at Cleveland-based Key Private Bank, which manages $25 billion. “The market had been shoving aside any concerns as the market rallied off the bottom, to the point where we reached the stage of too much optimism.”
McCain says the losses won't undo the S&P 500's 67 percent advance since March 2009 as the U.S. economy expands. Gross domestic product may increase 3 percent this year, based on the median economist estimate compiled in a Bloomberg survey. That compares with a projection for 1 percent growth on average for countries in the European Union.
Profits for S&P 500 companies are forecast to jump 31 percent this year, the most since 1995, as banks, brokerages and insurers recover from losses. Earnings from continuing operations may reach $95.24 a share in 2011, exceeding the 2007 record, according to estimates of analysts tracked by Bloomberg.
“We'll get a sharp correction, but I don't think this spells the end of the bull market,” McCain said.
