Just Another Average Recovery?

There is a nice chart from Citigroup Global Markets this morning, click to enlarge, courtesy of Citigroup.

Tobias Levkovich, the Citigroup' s US equity strategist, issued an updated 2010 Outlook for the US markets on the last American trading day of last year:

Gains likely to be more tempered in 2010. After a tumultuous 2009 and a roughly 25% gain in equities, the probabilities of sustained double-digit appreciation in 2010 seem rather low when looking back at history. In the past, during the year after the one in which recessions ended, the S&P 500 has gained less than 1%, on average, despite earnings growth that averaged better than 10%. Since we expect teen-like EPS gains in 2010, equities can move higher but one should not anticipate substantial gains for the full year. Nonetheless we have tweaked our S&P 500 target up to 1,175 from 1,150.

Earnings strength should bolster the market early in the year. Rising industrial activity, tight cost controls, and inherent operating leverage should provide a significant boost to 4Q09 and 1Q10 reported earnings, ahead of current Street estimates, in our opinion, though some of the late 2009 strength could be subject to early 2010 profit-taking. Nonetheless, the S&P 500 may climb as high as 1,250, leaning heavily towards 1Q10, and things may wane towards mid-year.

Reduced liquidity and higher expectations could lead to market challenges by 2Q10. The Fed is indicating that it will remove some of its monetary accommodation as early as March 2010 and Citi’s economists expect the fed funds rate to climb to 1.0% by year-end from essentially zero now. As yields begin to climb, we would expect P/E multiple compression to ensue, restraining much of the EPS growth benefit. In addition, we suspect that analysts will increase their forecasts sharply if companies top their estimates by significant margins, thereby establishing higher hurdles to overcome in the future, which may lead to some disappointments as the year progresses.

Portfolio positioning may need to shift to more defensive names during the year. While a risk-oriented trading posture still seems appropriate early in 2010, a shift to defensive segments of the market may be required sometime in 2Q10. Thus, investors will find it necessary to adjust their portfolios more frequently in order to post strong relative returns. As such, our overweight stances on Capital Goods, Energy and Consumer Services may need to shift to Household Products and Telecom Services later in 2010, for instance, during the year. In addition, the so-called high quality trade may generate better returns than the alleged junk beta trade over the course of 2010.

Equity investors could be very focused on the mid-term elections. Given weakness in poll numbers for Democrats of late, especially from independents, the mid-term elections may loom over markets as many investors have preferred divided government in the recent past. Thus, one could witness markets easing off as spring slips into summer and the electoral season swings into full bloom, with the Street waiting to see how the political winds blow. With the Bush tax cuts expiring, substantial government involvement in various industries and yawning budget deficits, some clarity on the country’s political direction may become more important to capital markets.

Indeed, it is quite difficult to find a bear these days! Or, pick yourself?

There is an excellent compilation of predictions and outlooks for 2010 at The Pragmatic Capitalist.

Yea, and watch these non-existing bears!