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Wall St. Strategists Quietly Summon the Bull for ’13

Michael Santoli

Any investor who started watching the markets in the last decade would have a hard time believing there was a time when the casual utterances of popular Wall Street investment strategists would send the Dow surging or skidding. It's like hearing that the "experts" used to predict the weather by studying animal guts, or that Americans once respected their Congressmen.

It's been a long time and two bear markets since the likes of Goldman Sachs' Abby Joseph Cohen or Prudential's Ralph Acampora could send the buy and sell orders flying as their words hit the wires. Heck, for a while there in the 1990s, even secondhand rumors of an "asset-allocation shift" by Elaine Garzarelli, credited by some with predicted the 1987 crash, could tangle the tape.

Today brokerage-house strategist tend to be more modest personages, unburdened by wide renown, articulating their earnings forecasts and their sector recommendations to institutional investors and their own firm's brokers, most of them emitting a Standard & Poor's 500 index forecast only with self deprecation and reluctance.

The public can't summon much excitement about stocks, the indexes have gone sideways for a dozen years while being cut in half twice, and Wall Street firms see little to gain in having an attention-hogging market handicapper going out on a limb with bold market calls.

Yet with all that said, it would be a mistake to ignore the collective work of the dozen or so strategists who represent the larger investment banks to clients and the media. For one thing, individually they put out some useful parsing and packaging of economic and market analysis. As a group, they've gotten things roughly right in their general tone of measured bullishness two of the last three years.

For another, in aggregate they offer a decent idea of where professional-investor psychology rests, given that they tend to reflect, consciously or not, what their institutional clients are up to. When they cluster along one end of the skepticism-to-optimism spectrum, it can pay to be alert for the market defying the cozy consensus.

A year ago, depending on exactly which strategists are sampled, the average S&P 500 forecast for the end of 2012 was around 1375, a call for nearly a 10% expected gain from the 1257 level where it ended 2011. The index is now at 1409, a 2.5% overshoot (for now) of the average prediction, which in this game qualifies as a mere rounding error.

In 2010 the Street forecasters pretty well nailed it, too, when the market also rose just under 10%.

Of course, in between these years was 2011, when the S&P 500 rather oddly finished almost precisely flat despite being up handily in the spring and then falling 20% in the summer. The strategist guild had predicted — you guessed it — a 10% gain.

This seems to be how it goes these days, the Street as a group leaning moderately bullish, no doubt a vocational tendency, but gathering somewhere around the equity market's historical annual rate of return (once one or two outlying mega bears or snorting bulls offset one another).

This suggests that, once all the 2013 outlook reports make there way into the public domain over the next couple of weeks, an average forecast anywhere near 10% should simply be viewed as the standard Street "plug factor" rather than a bold forecast or a sign that the talking heads are playing Polyanna.

The early run of 2013 predictions the slightest bullish slant so far, with a few penciling in a roughly flat year to come (Gina Martin Adams of Wells Fargo Securities, Jonathan Golub at UBS and Adam Parker of Morgan Stanley — the latter being last year's bear mascot, who was looking for a decline of 7% in 2012) and at least two (Savita Subramanian at Bank of America Merrill Lynch and Tobias Levkovich at Citigroup) looking for the S&P to climb between 13% and 15%.

Yet it says something about the level of sobriety infusing today's post-crisis Wall Street that a brokerage-firm talking head suggesting the market can rise 15% almost qualifies as devil-may-care happy talk.

Which is where the Sell-Side Indicator comes in. BofA Merrill Lynch's Subramanian maintains this gauge of Street strategists recommended asset-allocation mix among stocks, bonds and cash. The indicator was started by her Merrill predecessor and its data history runs back to the mid-1980s.

The recommended allocation to stocks just perked up a bit to 46.5%, but remains at levels well below the historical norm and the traditional "balanced portfolio" target of 60% to 65%.

When strategists have been cautiously counseling a below-average equity stake, the market in contrary fashion has risen the subsequent year at a better-than-average frequency. And, as now, when the equity allocation has been below 50%, stocks have been higher a year later 100% of the time, with a median gain of 30%. That is not Subramanian's official call, but this is one factor in her upbeat view of 2013.

There are plausible quibbles with this data tool. For one, not much attention is paid any more by clients to sell-side asset-allocation models. It is also a slow-moving indicator that provides context rather than good tactical cues. The strategists' reluctance to shift back toward stocks no doubt parallels the typical stance of risk-averse investors in a heady bond bull market, and perhaps is simply a symptom of the "New Normal" post-crisis economic hangover.

It's merely one little snapshot of the market's mood. But it shouldn't be dismissed by investors who are overconfident in a dour market outlook and aren't mindful of "upside risk."