Wednesday, February 3, 2010

Faber Says S&P 500 May Drop 20% on Economic, Earnings Prospects

The Standard & Poor’s 500 Index may retreat 20 percent from a 15-month high because stocks are expensive given prospects for economic and profit growth, Marc Faber said.

The benchmark index for U.S. stocks, which closed at 1,150.23 on Jan. 19, may fall to 920, said Faber, 63, who recommended buying stocks in March, before the biggest rally since the Great Depression. The index surged 70 percent from a 12-year low in March before dropping 5.1 percent to 1,092.17 through yesterday. The S&P 500’s price-earnings ratio had jumped to 25, the highest since 2002, data compiled by Bloomberg show.

“The market has become overbought,” Faber, who publishes the Gloom, Boom and Doom report, said in a phone interview from Switzerland. “There isn’t a meaningful improvement in the economy taking place. The economy may disappoint somewhat in the next few months. The statistics that are being published are very questionable. The economy has stabilized, but isn’t really expanding.”

Consumer spending, which accounts for about 70 percent of the economy, probably increased at a 1.8 percent annual rate in the fourth quarter after rising at a 2.8 percent pace in the previous three months, economists said before a Jan. 29 report from the Commerce Department. The jobless rate held at 10 percent in December, near a 26-year high, the Labor Department said on Jan. 8.

Not That Great

“With unemployment staying at a relatively high level and with the revenue side being weak, I don’t think that corporate profits will be that great in 2010,” Faber said. “Basically, the profits have been boosted by aggressive cost-cutting. The revenue side of corporations is weak.”

A record nine-quarter profit slump for S&P 500 companies is projected to have ended in the fourth quarter with a 73 percent increase in earnings. Sales at the 122 S&P 500 companies that have reported results for the period since Jan. 11 have increased 13 percent, Bloomberg data show.

Faber, who advised investors to buy U.S. stocks on March 9, when the S&P 500 reached its lowest level since 1996, said the gauge may end the year lower than the close on Dec. 31. The index rose 23 percent in 2009, ending the year at 1,115.10. “This year, investors will never achieve returns as high as in 2009,” he said. “Stocks are relatively high compared to the fundamentals.”

Financials, Commodities

While Faber said he cannot predict which industries will be the laggards, he highlighted weakness among financial and commodity-related companies. “Financials have already been quite weak,” Faber said. “It’s kind of a warning sign for the market. They may weaken further, especially the banks. Also commodities-related stocks could weaken somewhat as commodity prices ease.”

The S&P 500 Financials Index rallied 146 percent from a 17- year low in March before dropping 5.2 percent last week as President Barack Obama called for limiting the size and trading activities of financial institutions as a way to reduce risk- taking and prevent another financial crisis. Measures of energy and raw-materials and energy shares in the S&P 500 have retreated more than 1.5 percent in 2010.

Faber correctly predicted in May 2005 that stocks would make little headway that year. The S&P 500 gained 3 percent. He was less prescient in March 2007, when he said the S&P 500 was more likely to fall than rise because the threats of faster inflation and slower growth persisted. The S&P 500 climbed 10 percent between then and its record of 1,565.15 seven months later.

In his interview this week, Faber said that the S&P 500 may rise as high as 1,250 or 1,300 this year before declining again.

“Usually March, April are seasonally strong months,” he said. “We’ll get a rebound. In general, high-quality and large market capitalization stocks are reasonably priced considering you have zero interest-rates. As these markets go down, the high-quality, large-market-cap stocks will go down less than the smaller-cap stocks.”

--Editors: Nick Baker, Michael Regan

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