I give the team at Morgan Stanley Smith Barney credit for being somewhat unconstructive (read: realistic) on equities in light of the fact that this is an almost verboten position for a large Wall Street firm to take.
Chief Strategist David Darst (and equities strategist Adam Parker) is out with the latest MSSB Asset Allocation and Strategy Commentary for May, the firm is sticking to its guns from the October 2011 underweight stocks recommendation they made.
Within the piece is a good Bull/Bear face-off of factors for stock investors to consider…
Equities Bullish Factors
* Factors arguing in favor of equities include: (i) negative real interest rates, six central banks’ coordinated liquidity provision to funding markets, the Long-Term Refinancing Operation by the European Central Bank, and possible further monetary stimulus in the US; (ii) continued GDP growth in emerging Asia and Latin America; and (iii) policy easing and a likely soft landing in China (Morgan Stanley continues to estimate real GDP growth of 9.2% in 2011, 8.5% in 2012, and 9.0% in 2013).
*As of May 18, the consensus of analysts’ forecasts for S&P 500 calendar-year earnings per share growth is 14.7% for 2011, 8.5% for 2012, and 11.9% for 2013, according to Thomson Reuters.
* Recent consumer credit, motor vehicle sales, housing starts,and ISM manufacturing and non-manufacturing data still reflect continued expansion.
* Producer and consumer price inflation rates remain at low levels and deflation risks, while not eliminated, have faded.
* Equity 12-month forward price/earnings ratios are not excessive and the earnings yield (the inverse of the P/E ratio) is at very high levels relative to Baa corporate bond yields.
* High US corporate cash levels, which enable increased dividend payouts, stock buybacks, and mergers and acquisitions activity.
Equities Bearish Factors
* As of the end of April, US unemployment was 8.1%; the broader measure
of unemployment, U-6, was 14.5%.
* Medium-term GDP growth may be held back by: (i) continuing foreclosures,
home price weakness and a significant shadow inventory overhang;
(ii) bank, government, and household deleveraging; (iii) state, local,
and federal government fiscal austerity measures; (iv) recessionary
trends in Europe; (v) decelerating growth in China, India and Brazil; and
(vi) lackluster jobs growth, regional industrial production, retail sales,
durable goods orders, and real personal income trends.
* Global investors and officials have continuing concerns about the quality,
maturity structure, and magnitude of several countries’ sovereigndebt
burdens and their ability to service such obligations.
* Germany, France, several other Euro Zone countries, the UK and the
US have been implementing fiscal austerity measures; absent political
change, US fiscal drag will likely be significant in 2013.
* US stocks are not undervalued using long-term earnings metrics; the
Shiller P/E—that is, price divided by 10-year average earnings—for the
S&P 500 is 20.8, 27% above its long-term average.
* Real median household income has fallen 10% since 2007.
* Analysts’ consensus earnings estimates for 2012 have fallen 6% versus
their peak and appear likely to decline further.
* In 2013, maximum tax rates on dividend income are set to almost triple,
to 43.4% from 15.0% currently; on capital gains, to 23.8% from 15.0%
currently; and on interest income, to 43.4% from 35.0% currently.
The negatives outweigh the positives in my view, but the positives are definitely worth keeping in mind. It’s not as though good things can’t happen out of left field (German deposit insurance for all EZ banks, and end of forced austerity, a surprise jump in US hiring etc.) – just when few expect them to.