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Stocks will disappoint investors

November 01, 2010 – Comments (4) | RELATED TICKERS: XOM

Here is my current take on the market in anticipation of QE2. 

a) Short - term

There are no positive surprises for the market. It is well known Bernanke will announce QE2 on Wednesday. The size of QE2 is also an open secret: $2 Trillion, stretched over the next couple of years. This money should theoretically provide some support for the market, but of course the hedge funds have already bought up the indexes in anticipation of the move and are now only waiting for the announcement to sell the news. The most likely outcome is a hysterical 2-3% one-day spike when Bernanke announces a $2 Trillion program and the market pretends to be surprised, and then the sell-off should take us back to where we are now.

b) Medium-term

Stocks are still overvalued and the indexes are still full of future Ch 11 candidates. And it does not help that S&P is weighted by market cap, which at this point tilts it so heavily towards such pathetic losers as XOM and COP. We are almost at the same level that we reached in April when I said there was nothing left to buy because everything was overvalued. And when I said that, QE2 was a part of my estimate. (How did I know? It was easy. Do you think I am such a fool I would think Bernanke could stop at QE1?).

So I don't expect much upside from these levels. I think S&P will spend most of the next year oscillating between 1200 and 1300. Price in 5% inflation next year, and any real gains will be modest. What about the peaks and the troughs? I think we will see 1400 once or twice in the next 14 months, but we will also see 1140 at least once.

c) Long-term

In the grand scheme of things, we face another disappointing 6 years. S&P should reach 1500 in 2017, underperforming against inflation. By that time enough dinosaurs will be kicked out of the index and enough IPOs will be added and the lights will turn green. However, those who sell today and put all their cash in TIPs will have few regrets in 2017.

d) Very long term

After 2017, there will be a very strong bull market. Dow 36000 will become reality in 2028 or so.

e) Long-term failure

The very long-term future will be bright, but investors will still find a way to ruin it for themselves. Most people will miss the party because the next decade will bring a general disappointment and distrust of stocks. The bankruptcy of XOM will still be weighing too heavily on everyone's mind when the secular bull begins for real. People will feel that low valuations don't matter anymore because every company will ultimately go bankrupt.