The Forecast for 2010: Looks Like Volatility

Wow. Two strong rallies to kick off February. It’s great to see some buying interest after January’s sell-off. But I would caution that 2010 will be more volatile than the final 9 months of 2009, when stocks were on a one-way trip higher.

You could argue that stocks are overvalued based on index P/E levels. The trailing P/E for the S&P 500 is 21. At the same time, companies are once again beating earnings estimates. Business is better than analysts expected.

The forward P/E for the S&P 500 is 14. That’s based on analysts’ expectations of 2010 earnings. If analysts are once again low-balling the numbers, then the S&P 500 may actually be cheap. But if unemployment continues to weaken, or if banks don’t loosen up lending, or if the housing market doesn’t improve, then perhaps stocks are expensive.

And so, stock prices will very likely be more volatile this year. That means it’s going to be even more important to do good research and buy quality stocks at reasonable valuations. It’s also going to be critical for investors to focus on the sectors that will outperform this year. Of course, all of this will be part of our ongoing conversation here in Daily Profit.

Jobs

Pimco’s Mohammed El-Erian is out today saying that stocks are in trouble because unemployment will continue to rise. Of course, he’s right – if unemployment continues to rise. But frankly, I’m not convinced that unemployment will continue to rise.

Yesterday, I included an interesting chart from Bloomberg that suggests we might see hiring pick up. And today, the ADP Employment Change report for January came in much better than expected.

Not only that, but President Obama has FINALLY made job creation a priority. And Congress is expected to introduce an $80 billion jobs bill. It’s about time the government allocates resources that could actually help Americans who lost their jobs find new work.

Now, government initiatives are always risky, as bills get loaded with pork and waters down their effectiveness. But this is a good move, and may help prove El-Erian wrong.

Want to hear a great contrarian indicator? Investor’s Intelligence released its weekly investment newsletter writers’ survey. And it sounds terrible. 39% of investment newsletter writers think U.S. stocks are about to drop 10%. That’s the highest reading since 1984.

But you know what? This is good news. High levels of bearishness can actually be quite bullish. And for the record, Investor’s Intelligence didn’t ask me what I thought. I have a hard time seeing the Dow drop 1,000 points from current levels.

Cisco

Finally, we’ll hear from Cisco (Nasdaq: CSCO) after the closing bell today. Cisco is very important because its sales are a proxy for corporate spending. Expectations are high for the company, and if Cisco offers some upside in its forward guidance, it would be very good sign that corporations are spending again.

Published by Wyatt Investment Research at