Doom-and-gloom analysts say high unemployment will hammer large-cap stocks next year. Richard Skaggs, chief equity strategist at Loomis Sayles, has a slightly different view.
As corporate earnings continue to improve, the Standard & Poor's 500 Index will likely hit 1,400 by the end of next year, a 12% jump from yesterday's close of 1241.59, according to Richard D. Skaggs, chief equity strategist at Loomis Sayles & Co LP.
Corporate earnings of the S&P 500 are up 50% from 2009 and Mr. Skaggs predicts they will hit 15 times trailing earnings next year. “A typical S&P 500 company is generating 7% to 8% revenue growth and should be able to generate 10% to 12% earnings growth,” he said. “People have a good chance of making money in large-cap stocks next year.”
And even though unemployment in the U.S. continues to hover around 10%, Mr. Skaggs dismisses the notion that joblessness will drag the market down.
The lowest that the unemployment rate gets to is 5% to 6%, so at close to 10%, its “three to four [more people out of 100] out of work,” he said.
In addition, most S&P companies have international units. Indeed, 60% of S&P 500 companies' earnings come from global business activities. Such profits are not likely to be affected by unemployment in the U.S., Mr. Skaggs noted. “Anyone who says ‘I won't invest in stocks until unemployment goes below 9% has already missed the boat,” he said
That would seem to be the case. S&P 400 stocks have returned 26% this year, while the benchmark S&P 500 has shot up by 13.35%.
Mr. Skaggs likes two sectors in particular: U.S. global industrials and consumer discretionary goods. Global industrial companies are benefiting from cross-border growth and low valuations, he said, noting that S&P industrials are up 25% so far this year. Specifically, Mr. Skaggs notes that Emerson Electric Co. Ticker:(EMR); is an example of a global industrial company that exemplifies this trend.
Similarly, he said, consumer-discretionary-goods companies such as Coach Inc. Ticker:(COH) and Tiffany & Co. Ticker:(TIF) will continue to do well, especially if people have more money to spend as result of proposed tax cuts.
Two wild-card sectors that might be good bets are financials and energy, Mr. Skaggs said.
JPMorgan Chase & Co. Ticker:(JPM) and Wells Fargo & Co. Ticker:(WFC) are well-managed companies that are trading at low valuations, and as the economy continues to improve, the demand for credit quality and loans should increase. “Financials could be a good place to invest in 2011,” Mr. Skaggs said. Similarly, if natural gas prices improve, energy could be a good play.
Overall, Mr. Skaggs is confident that 2011 will be a better year for the markets. “To the extent that it's possible to have a normal year, I think 2011 will be close to it.”
