Bullish on America: ING sees strong growth and a big stock rally in 2010
The reason for ING's optimism: It expects pent-up demand to become unleashed next year. Companies that have delayed everything from equipment upgrades and maintenance to expansion plans will be forced to begin modest spending on these items. And consumers, who have also delayed purchases and maintenance on their homes while paying down debt, will also begin spending at modestly higher levels.
In addition, after a year of tightening their balance sheets, ING sees banks beginning to lend at higher levels, which will help businesses move forward with plans for expansion and hiring. That, in turn, will raise consumer confidence and investor expectations, sending the market on the next stage of its current bull run.
"I think the S&P 500 will get to somewhere between 1135 and 1175 sometime real soon, perhaps by the end of the year," said Uri Landesman, ING Investment Management's head of global growth during a briefing on Tuesday where ING laid out its economic and market outlook for 2010. "Then I think we probably trace back a little bit, and the next run that ends at 1250 or 1275 at the end of next year will be led by more high-quality stocks."
A Return to Revenue Growth
Consumer spending will be the key ingredient for fueling the market rally and spurring the economic growth that ING now expects. The company is predicting GDP growth at 2.8% in the first quarter of 2010, 3.4% in the second, 4% in the third and 4.4% in the fourth.
Such improved GDP increases would certainly excite investors. "The consumer is going to do a little better than the consensus thinks right now, and that will be enough to return the U.S. back to that 2.5% to 3% GDP growth that the economy generally grows at," said Landesman.
Improved consumer spending will have another benefit as well. Paul Zemsky, ING Investment Management's head of asset allocation and multi-manager investments, pointed out that although companies have maintained profit margins by shedding labor quickly during the downturn, even a modest increase in consumer spending now will likely lead to higher revenues. And that could continue the trend of better-than-expected earnings. Higher corporate earnings mean the markets will likely rally higher.
Markets will also keep rising if ING's forecasts for housing and unemployment come to fruition. The company expects housing starts to climb from about 620,000 in the fourth quarter of 2009 to 875,000 in the fourth quarter of 2010. It also predicts that a return of banks to the debt markets will fuel expansion, which will reverse the rise in the unemployment rate during the first quarter of 2010 -- dropping it back to 9.9% and then to 9.3% by year-end. In fact, the pent-up demand for expansion may be so strong, according to ING, that by the end of 2011, unemployment could be as low as 7.8% (skeptical? here's a far more dire forecast).
Money Moves from Debt to Equities
Additionally, Zemsky said portfolio allocations will begin to shift next year, bringing a flood of money into equities, which will also propel the market higher. "Soon, we will see people moving from fixed-income to equities because the spreads [on bonds] can't get much better than they've been this year."
Both Zemsky and Landesman acknowledged that plenty of scenarios could change the company's projections for next year, but they insisted that they're simply betting on a return to normal cycles as people gain more confidence in the economy.
Which sectors are likely to benefit most from the possible rally? Here are some top prospects and comments from Landesman.
Technology – Bet on tech firms that will benefit from basic spending on hardware, software and other services. "Companies have literally skipped an entire upgrade cycle."
Consumer discretionary – The leading media companies and some of the top Internet commerce companies will be winners.
Industrials – "The high-quality names in capital goods and transportation will benefit from a U.S. recovery."
Financials – It's hard to have a sustainable rally without them, especially when you consider how much they've been beaten down. "The major money-center banks are still pretty cheap on a historical basis."
Materials – Energy companies deserve attention because commodity prices are likely to rise next year.