(Bloomberg News) The post-election rout in U.S. stocks has driven the Standard & Poor's 500 Index down so far that it would have to advance 26 percent to reach the valuation of bull markets since John F. Kennedy was in the White House.
Investors have seen $806 billion erased from the value of American equities since President Barack Obama was re-elected Nov. 6 in the biggest decline since May. The combination of falling stocks and rising profits as the economy recovers has left the S&P 500's price-earnings ratio below the ending level of eight of the nine bull markets since 1962 and beneath the average of any since Ronald Reagan was in power.
Bears say the 4.8 percent drop in the S&P 500 and valuations show investors are losing confidence that Congress and Obama will reach a budget compromise that would keep the recovery from stalling. Bulls, including the top strategists at six Wall Street firms, say that the declines are another reason to buy and that stock prices from Apple Inc. to Dollar Tree Inc. are bound to improve as earnings increase.
"The stock market looks cheap because people are way too pessimistic about what growth looks like for the next 10 years," said Brian Jacobsen, who helps oversee $208 billion as chief strategist at Wells Fargo Advantage Funds and predicts the S&P 500 will rise 47 percent to 2,000 in 2014. "You can get big and rapid moves in the market when expectations are so low."
Concern about the so-called fiscal cliff -- $607 billion of spending cuts and tax increases that automatically go into effect Jan. 1 -- overshadowed better-than-estimated profit reports from Cisco Systems Inc. and Home Depot Inc. last week, sending the S&P 500 down 1.5 percent to 1,359.88. Obama began face-to-face talks with top Republicans and Democrats on Nov. 16 after he and House Speaker John Boehner said they will work toward an agreement. Boehner and White House Press Secretary Jay Carney described the meeting as "constructive."
Even as shares fall, strategists are optimistic about gains next year. The S&P 500 will rally 17 percent to a record 1,585 by the end of 2013, according to the average forecast. Futures on the index expiring next month climbed 0.2 percent to 1,363 at 8:22 a.m. in London today.
Douglas Kass, the founder of Seabreeze Partners Management Inc. in Palm Beach, Florida, who recommended buying stocks at the March 2009 low says the benchmark gauge may rise 18 percent to 1,600 next year as politicians reach a budget compromise and the economy continues to expand.
"The No. 1 mistake that is being made is the old proverb, 'Once bitten, twice shy'," Kass said in a Nov. 14 Bloomberg Radio interview with Tom Keene. "Market participants today are incorrectly playing the last war, which took place during the budget deliberations in August of last year. Those fears are misplaced."
Savita Subramanian of Bank of America Corp. says the index will rally to 1,600 on rising corporate profits and diminishing concerns about the global economy. John Stoltzfus, at Oppenheimer & Co., forecasts the gauge will climb to 1,585 and Goldman Sachs Group Inc.'s David Kostin estimates 1,575, based on support from the Federal Reserve's third round of bond purchases. Fed Chairman Ben S. Bernanke pledged in September that the central bank will buy $40 billion of mortgage securities a month until the U.S. labor market recovers.
Optimism is misplaced unless Obama and Republican leaders are able to agree on measures to avoid the mandated cuts and tax increases, according to James Bianco, president of Bianco Research LLC in Chicago.
The $607 billion burden could cause the world's largest economy to shrink 0.5 percent next year, according to a Nov. 8 Congressional Budget Office report.
"Up until the election day no one had priced in a fiscal cliff because the thinking overwhelmingly on Wall Street was there wasn't going to be one," Bianco said in a Nov. 14 Bloomberg Television interview. "We're only now starting to price it in and we've only been pricing it in for a week. If we continue to keep our pencils down, there's going to be a lot more pain."