Barron’s released its 2012 stock-market outlook this weekend. In the issue, Barron’s surveyed 10 Wall Street strategists on the outlook for the U.S. stock market. Most of the strategists are the heads of equity departments at Wall Street’s biggest banks.
What are the Street’s equity strategists forecasting for the S&P 500 next year? Solid gains, of course. Would you expect anything less from the heads of equities at Wall Street’s big banks? Wall Street earnings and bonuses are highly correlated with stock-market performance. It doesn’t pay to be a bear on Wall Street. If investors don’t buy stocks, commissions plunge and it becomes difficult to distribute overpriced IPOs.
On average, the strategists surveyed by Barron’s are expecting the S&P 500 to end 2012 at 1360—for an 11.50% gain. Not surprisingly, the strategists in last year’s stock-market outlook issue were calling for similar gains this year. To wit:
Collectively, the 10 strategists and investment managers surveyed by Barron’s see the S&P 500 finishing next year  near 1373, roughly 10% higher than Friday’s close at 1244. But this solid if hardly extravagant target belies their increasingly expansive view of the U.S. stock market. A majority see 2011 as the year when a sustainable economic recovery takes root, winning over skeptics and persuading both companies and consumers to relax their stranglehold on squirreled-away cash.
It gets better. Nearly all strategists in last year’s survey expected stocks to outperform bonds, especially Treasuries. Stocks, the strategists told us last year, were “the proverbial best house in the neighborhood.”
Within the equity market, Wall Street’s strategists advised Barron’s readers that in 2011 the best-performing sectors would be energy and industrials and the sectors to avoid were utilities and health-care stocks.
How did the soothsayers’ forecasts for 2011 pan out? With less than two weeks to go before year-end, the S&P 500 is trading more than 13% below the strategists’ 1373 year-end price target. Year-to-date, the best-performing sector in the S&P 500 is utilities, up an impressive 15.3%, and the third-best-performing sector is health care, up 8.9%. As for stocks being the best house in the neighborhood, that didn’t pan out too well. The Vanguard Intermediate-Term Treasury fund is up almost 10% for the year compared to a loss of about 4% in the S&P 500.
With such a dismal record, investors might do better in 2012 by not just ignoring but doing exactly the opposite of what the Street’s equity strategists advise.
Citigroup’s chief equity strategist tells us that U.S. stocks are cheap on a historical basis—especially compared to U.S. Treasuries. Sounds like another way of saying investors should buy stocks instead of bonds. You will probably want to own some bonds in 2012.
With regard to sectors, most strategists favor tech shares and recommend that investors avoid financials and raw materials. If history is any guide, financials and raw materials will outperform technology shares in 2012.
Finally, the best-performing stocks are likely to be foreign shares. Why? Because Barron’s 2012 stock-market outlook tells readers, “Given the challenges and the competition, the U.S. stock market just might be the best house on a bad block next year. It has been so this year, as the S&P 500, though relatively flat, has outperformed every other market index in dollar terms.”
Jeremy Jones, CFA
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