For stock investors, the current focus should be the trend in the US stock market. Nothing means more for absolute returns in 2009 than the trend in the world's largest stock market. And here a new bear market rally has started, which is likely to lead to a rise in US stocks by another 7-10% or up to the 825-850 range for S&P500 in the short term.
Our year-end 2009 target is 950 or around 25% from today's levels. Investors' risk aversion has obviously risen after the outbreak of the credit crisis and ex-ante risk premia are at least one percentage point higher than normal. We anticipate this unusually high risk aversion to gradually ease off, when investors start to see through the losses in the banking industry and as funding markets continue towards normalisation.
For the stock market to show sustainable gains, more key factors have to show recovery signs. On our five point recovery list, the only recovery signal available now at the end of Q1 09 is the global industrial cycle. Easing of negative earnings revisions for 2009/10 could be next. US housing, the credit market as well as investor/consumer confidence all need to heal for a market recovery to be sustainable.
Still, there is a risk that the bear market will continue for most of 2009. Our distress case could bring stocks to around 625, and taking into consideration recent history we cannot preclude this short-to-medium-term outcome. However, to experience a 20% correction from the already inexpensive stock market levels, the crisis should be brought to "the next level" through clear signs of deflation and hence prolonged "depression-like" economic development for the US and global economy.
