Can the market kick up its heels one more time?
It's as if Wall Street suddenly discovered Prozac.
On paper, there are plenty of reasons for investors to be anxious about the financial markets' prospects this year.
For starters, the global economic boom that drove international stock and commodity prices higher in recent years is starting to cool. Economists project global growth of 3.2 percent this year, down from 3.8 percent in 2006, while the U.S. economy will trail at about 2.5 percent.
Corporate profits, which have propped up stock prices here at home, are also expected to weaken. Earnings among companies in the S&P 500 index are expected to rise 9.3 percent in 2007, down from 15.4 percent last year.
And the stock surge is now over four years old, an age at which a typical bull market is put out to pasture.
Yet as 2007 kicks off, economists and market watchers are about as optimistic as they've been in recent memory. Eight out of 10 money managers polled by the Russell Investment Group predict that stocks will post their fifth consecutive positive year. One in three thinks the equity markets will return around 10 percent or more in 2007.
Jeffrey Kleintop, chief investment strategist for PNC Wealth Management, predicts the S&P 500 will climb to 1550 next year, about a 9 percent rise in the blue-chip index. Tobias Levkovich, chief U.S. equity strategist for Citigroup Investment Research, thinks the S&P could do even better-hitting 1600, for a 13 percent jump.
To be sure, high-single-digit or low-double-digit gains are simply in line with the stock market's historic average performance dating back to 1926, according to Ibbotson Associates. Last year, the S&P 500 returned 15.8 percent, its best year since 2003. And despite recession fears and a housing market slowdown, the Dow Jones industrial average hit a new all-time record in 2006 and is now poised to pierce the 13,000 level for the first time. "To hear investment managers tell it, Wall Street will belong to the bulls in 2007," says Randy Lert, Russell's chief portfolio strategist.
But "that's what bothers me," says James Paulsen, chief investment strategist for Wells Capital Management.
While optimism is always welcome, there's a fine line between confidence and wishful thinking. Jerry Webman, chief economist for OppenheimerFunds, says most market strategists, no matter their outlook for the economy, are finding reasons to be bullish about stocks.
"Oddly, the people who are bearish on the economy say that if the economy isn't great, the Federal Reserve will [cut rates] and the markets will be just fine," Webman says. "At the same time, people who say, 'Gee, the economy is much stronger than the headlines indicate,' think that earnings will stay strong and the stock market will be OK."
Optimism often leads to heightened expectations. And the greater the expectations, the greater the likelihood that the economy and markets will fall short.
This is why Stuart Schweitzer, global markets strategist for JPMorgan Asset & Wealth Management-who predicts stocks will rise modestly-says equity investors should brace themselves for "stomach-churning bumps."