5 stock experts foresee 2009 rebound

By Adam Shell, USA TODAY
NEW YORK — With the stock market on track for its worst year since 1931, Wall Street strategists are predicting a rebound in 2009.

A review of year-end '09 targets for the Standard & Poor's 500 index by five top market strategists found that nearly all expect double-digit percentage gains, despite another year of sharp swings. The most bullish projections call for a 24% gain from current levels.

Wall Street's gurus, however, were also bullish heading into 2008. While most predicted a stormy first half, none forecast the financial hurricane that engulfed investors. The S&P 500 is down 39.3% in 2008, the worst since a 47.1% drop in 1931, S&P says.

But predicting a rebound may be based on more than hope. Stocks have snapped back sharply after past historic declines. After stocks bottomed out after an 89.2% drop in July 1932, for example, the Dow Jones industrials rallied 93.9% the next two months, Dow Jones Indexes says.

Similarly, the S&P 500 rebounded 25.2% in 1938 after falling 38.6% in 1937, S&P says. After the 2000-02 bear market bottomed, the S&P 500 rebounded 26.4% in 2003.

One caveat: The S&P 500 fell 15.2% in 1932 after its record 1931 decline.

The strategists are betting on:

•An economic recovery. At some point after mid-2009, a rebound should occur, says Thomas Lee, U.S. equity strategist at JPMorgan Chase. But Lee says investors shouldn't rush back into stocks immediately.

He expects a rally early in the year on initial optimism about the bailout plans. Then he expects a pullback because of headwinds such as weak earnings. He says tailwinds such as lower gasoline prices, fiscal stimulus and a stabilization of the housing market will help stocks by year's end.

•Government stimulus plans. "The size of the global policy response to stabilize both the financial system and the growth outlook is virtually unprecedented," writes Abhijit Chakrabortti, strategist at Morgan Stanley.

•A repeat of history. "When this bear market ends, be prepared for a fast and furious partial recovery," S&P's chief investment strategist Sam Stovall writes in his 2009 outlook. Historically, the S&P 500 has recouped, on average, 33% of its bear market losses 40 days after a bottom.