In a recent report to Citi clients, Levkovich forecasts developments over the next several months that could whipsaw the averages and wrong-foot those with a nervous or impatient disposition. The report amounts to a roadmap for 2011 that identifies several hairpin turns, mainly in the initial stages, that could make the journey treacherous and hard to navigate.
First up, Levkovich asserts that the rally of the last few months has set retailers up for a decent holiday shopping season, even if retailers themselves foresee only so-so improvement on 2009. Any potential headway for the market from that bullish development could be brutally mitigated, however, by rising angst over whether the Bush-era tax cuts are extended, he warned:
"Deep uncertainty [exists] around the Bush tax cuts expiration and political resolutions around some sort of extension program . . . as ideological lines in the sand are being drawn by both the Democrats and the Republicans. Some of our D.C. sources suggest that there may not be a compromise deal by year-end and the next Congress will have to do something retroactive by some time in February of 2011. We sincerely doubt that this would make investors feel comfortable and could throw a monkey wrench into the late-year rally hopes that many investors seem to have."
Once the uncertainty is resolved, investors may turn their attention to the improvement in credit conditions and the stronger economic growth that they herald:
"Credit conditions support a healthy start to 2011 despite ambiguity around tax policy. . . . The sustained path of improving credit conditions provides a credible argument for GDP expansion, rising capital expenditures and a better jobs environment (which has slowly turned already). The near-term political battles in Washington over taxes and entitlements may restrain equities through year-end but the underlying economic trajectory looks promising."
An unwelcome development that Levkovich says could keep a lid on share prices for the next six to nine months is concern about "the sustainability of currently high margins." Corporate profits relative to revenues have expanded so much that the scope for further improvement has to be limited.
"Equity indices are likely to reflect that, suggesting that 2011 will face a bumpy ride, though one that should ultimately end with roughly double-digit U.S. stock price gains," Levkovich writes.
Sounds a lot like the way 2010 has played out. Having his roadmap may help make sense of market movements, but if Levkovich has things figured right, 2011 should feel like familiar terrain. What investors don't want to do is get caught zigging when they should be zagging. The best course seems to be either to take profits now, with stocks near a recovery high, or hold on and ride out the volatility. Once you've seen the "dip in road" sign, it may be too late to alter course.