Markets Will Rally to Year End

by Ben Warwick, Aspen Partners, cross post from Searching for Alpha Blog Newsletter, Advisor One

Equities were able to retrace over half their losses early in the month to post a large but manageable loss for August (see monthly index numbers below).  Momentum seems to be bullish after fears over S&P’s downgrade, and investors are left wondering if markets will continue their winning ways.

Our take is that the market will muddle through the fourth quarter up 3%-4%, ending up with a mid-single digit return for 2011.There are several reasons for this outlook. Stocks are cheap, with forward P/Es below average. Corporate balance sheets are strong, earnings are growing, and dividend yields are attractive compared to fixed income.

The lack of competition is one of the biggest drivers of this view. With 10-year Treasury notes paying around 2.25%, there simply isn’t anywhere left to invest. And with credit spreads continuing to widen, high-yield bonds seem too scary to take the limelight away from stocks.

I don’t foresee any staggeringly brilliant legislative moves that would right the economy immediately, or new Federal Reserve policies that will cause the Dow to skyrocket. But I do see us muddling through—and that’s not such a bad thing.

(Click here to enlarge table)

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About the Author

Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts,” and alternative investments. Blog history is available here.

Warwick is co-chief investment officer of Aspen Partners, LTD, an alternative investments specialist based in Atlanta, Denver, and New York, and CIO of Quantitative Equity Strategies, LLC. He is the author of several books, including Searching for Alpha: The Quest for Exceptional Investment Performance, (Wiley, 2000); The Handbook of Managed Futures, with Carl Peters, (McGraw-Hill, 1996); and The Worldly Investor Guide to Beating the Market: Beat the Pros at Their Own Game, (Wiley, 2001). He can be reached at [email protected].