Stocks Need 4% Drop to Reflect U.S. Recession, Strategists Say By Eric Martin and Michael Patterson [image: Enlarge Image/Details]<http://www.bloomberg.com/apps/news?pid=photos&sid=aElBF87dD5eQ>
Jan. 23 (Bloomberg) -- The U.S. stock market may fall another 4 percent to account for the possibility of a recession, according to strategists at Bank of America Corp., A.G. Edwards and Strategas Research Partners LLC. Thomas McManus, the chief investment strategist at Bank of America, and A.G. Edwards's Al Goldman say a drop in the Standard & Poor's 500 Index to as low as 1,250 would signal shares are priced for a contraction in the world's biggest economy. Jason Trennert of Strategas says the index needs to decline to 1,260 to ``fully discount'' a recession. ``We're not too far away from that now,'' Trennert, who predicts the S&P 500 will rally to 1,640 in 2008, said in a phone interview from New York. ``The odds of a recession this year have gone up substantially, but I still believe there's a chance we're going to skate past one.'' The S&P 500 has tumbled 16 percent from its all-time high last year as the worst housing market since 1991, a jump in unemployment to a two-year high and more than $100 billion of credit losses and asset writedowns at financial companies prompted analysts to cut their earnings estimates for the first half of 2008. The benchmark for U.S. equities lost 14.69 points to 1,310.5 yesterday, the lowest since September 2006. Trennert, 39, said his estimate for the S&P 500's fair value during a typical U.S. economic contraction is based on a 17 percent decline in profits from their peak and a price-to- earnings multiple of 17 for the index. Four Recessions America's economy has fallen into recession four times since 1980, according to the National Bureau of Economic Research, the Cambridge, Massachusetts-based organization whose seven-member committee determines when economic downturns start and end. The S&P 500 has climbed during three of those periods, advancing an average of 5.9 percent. Goldman of A.G. Edwards expects the S&P 500 to retreat from its current level as earnings decline and the economy contracts over a period of at least 10 months. He said the benchmark may rally by the end of this year to a record 1,600 as investors push up share prices in anticipation of a recovery in economic growth and earnings. ``After recessions come recoveries,'' said Goldman, 73, the St. Louis-based chief market strategist at A.G. Edwards. ``You've got to keep your wits about you.'' McManus, 51, wrote in a research note yesterday there is a ``high likelihood'' that a U.S. recession has already begun. He said ``many stocks'' in the S&P 500 would be priced for an economic contraction if the index falls to between 1,300 and 1,250. At the same time, he raised his recommended allocation for equities to 65 percent of total assets from 60 percent. Buying Stock ``It makes sense for investors to consider increasing their exposure to equities'' after declines in the past 12 months, wrote McManus, who expects the S&P 500 to rise to 1,550 by the end of this year. Goldman and Trennert were too bullish on U.S. stocks in 2007. Goldman forecast at the beginning of last year that the S&P 500 would rise 10 percent, while Trennert predicted a 13 percent advance. The index gained 3.5percent, weighed down by the biggest decline in financial stocks since 1990. McManus's forecast that the S&P 500 would rise 3.3 percent was the closest among strategists tracked by Bloomberg. David Bianco at UBS AG and Thomas Lee at JPMorgan Chase & Co. say the S&P 500 is already pricing in an economic contraction. Priced In Bianco, 32, the chief equity strategist at UBS, said in an e-mailed statement yesterday that any price for the S&P 500 below 1,350 suggests investors expect a ``broad U.S. recession.'' Still, he advised clients in a research note yesterday to buy shares after prices declined this year. In the past five recessions, shares reached their lows before the biggest year- on-year declines in earnings growth, he wrote. They rose 22 percent on average over the following six months, according to Bianco. Lee at JPMorgan says the S&P 500's decline from its peak and cheap equity valuations relative to bonds suggest investors are predicting the U.S. economy will shrink. Lee still expects the S&P 500 to climb to 1,590 by the end of 2008, according to a Bloomberg survey yesterday. ``Markets have overshot,'' Lee, 38, JPMorgan's chief U.S. equity strategist, said in a Bloomberg television interview. ``We are really approaching a very, very tradable bottom here.'' To contact the reporters on this story: Eric Martin in New York at [EMAIL PROTECTED] ; Michael Patterson in New York at [EMAIL PROTECTED] .
