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MarksJarvis: Stocks reach pre-recession peak

Investors waiting to see many fourth-quarter earnings released this week

Gail MarksJarvis

January 14, 2013

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With the urgency of the "fiscal cliff" behind the nation and the earnings hurdle for companies low, investors have pushed the stock market close to the high that occurred before the financial crisis.

The Standard & Poor's 500 closed the week at 1472, not far below the 1565 peak of October 2007 before the mortgage mess turned into the financial crisis and pulled stocks down 57 percent.

Yet, after a 5 percent climb in the first two weeks of January, stock investors hesitated Friday as they waited for their enthusiasm to be validated. This week, large banks including Bank of America, JPMorgan and Citigroup report earnings for the last quarter of 2012, and with financial company stocks up sharply in recent weeks, Wells Fargo on Friday gave investors pause about the earnings week ahead.

Wells Fargo, the nation's largest home lender, has found a warm spot in investors' hearts lately as the housing market shows signs of recovery. Yet the firm disappointed investors Friday with narrower margins than anticipated.

Meanwhile, analysts have lowered their profit expectations so greatly for the fourth quarter that investors are anticipating an easy hurdle for companies to jump as they report earnings. And that could continue to lift the stock market. People certainly seem to be feeling freer with their money. After running away from stocks since 2008, Thomson Reuters reported that investors added $7.5 billion to stock funds by the week that ended Tuesday.

Institutions are feeling relatively upbeat too. Citigroup strategist Tobias Levkovich reported Friday that the company's quarterly poll of institutional clients such as managers of hedge, mutual and pension funds shows "a sense of overall bullishness."

As a group they are expecting stocks to climb 8 percent this year, and more envision the possibility of a 20 percent gain than a 20 percent drop. That's a switch from the beginning of 2012, when they were bullish but were expecting the Standard & Poor's 500 to close out the year at 1347. Instead, it made it to 1426, climbing about 13.4 percent for the year.

Now institutions say they are more interested in buying stocks than bonds. About 84 percent said they expect to allocate money to stocks, and only 2 percent favor bonds, Levkovich said.

Yet they are also waiting for a better point to buy stocks after the strong early-year rally. Often institutions hold only about 5 percent in cash. But since October, their cash holdings have edged up from October's 7.6 percent to 8.3 percent.

Many expect stocks to swing lower temporarily in February as Congress begins to battle about the nation's debt ceiling.

But BMO strategist Brian Belski is criticizing investors for being "too focused on minutiae." He added, "We believe the underappreciation of earnings growth the past few years is likely to set up for larger-than-average market returns over the coming years."

Investors will get an inkling of what's to come as executives continue to report their outlooks with earnings releases over the next few weeks.

Investors Tuesday will focus on December retail sales. Expectations are for modest growth, and analysts continue to keep an eye on consumer behavior at a time when they are anticipating a more relaxed attitude given rising home prices.

The month's first manufacturing surveys, due this week, also will receive attention. Manufacturing has been held back by slow export demand with Europe bogged down in recession and slower growth in China. Still, investors were encouraged recently as Japan announced a major new stimulus and China reported that exports were much stronger than expected.

gmarksjarvis@tribune.com

Twitter @gailmarksjarvis