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CNNMoney Survey: Stock Market Rally Is Over

Monday, 08 Oct 2012 09:58 AM

Stocks have performed well in 2012 despite headwinds from cooling Asian economies, an ongoing European debt crisis and fiscal uncertainty in the United States, but the rally might be over.

A CNNMoney survey of 37 investment strategists and money managers finds that the Standard & Poor’s 500 Index will finish 2012 at 1,440, up 15 percent for the year, but more or less right where it was at the start of the fourth quarter.

Monetary stimulus measures or expectations for their arrival have kept stocks up this year, but lower interest rates and increased liquidity levels can only do so much, especially in the United States, where businesses of all sizes don’t know how much in taxes they will be paying next year.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

“I’m not suggesting for anyone to get out of their equity positions, but our view is that most of the gains for the year are behind us,” said Cetera Financial Group markets strategist Brian Gendreau, whose year-end target for the S&P 500 stands at 1,450, CNNMoney reported.

In the United States, tax breaks including the Bush-era tax cuts are due to expire at the end of the year at the same time automatic spending cuts are set to kick in, a combination known as a fiscal cliff that could siphon hundreds of billions of dollars out of the economy next year and send the country sliding into a recession if left unchecked by Congress.

Fears of the cliff have prompted many businesses to hold off on investing in new projects and hiring, as they don’t know how much in taxes they will be paying.

Electoral uncertainty has kept capital spending at bay as well, as a Mitt Romney victory or a re-election for President Barack Obama could have different tax implications.

“After the elections, lawmakers will have to face the fiscal cliff, and they only have a handful of days to debate and pass new legislation before the end of the year,” said Oliver Pursche, president of Gary Goldberg Financial Services, who expects the S&P 500 to finish the year at 1,435, CNNMoney added.

Thank the Federal Reserve for the market gains.

The Fed recently announced plans to buy $40 billion in mortgage-backed securities a month from banks to jolt the economy, a monetary policy tool known as quantitative easing that lowers interest rates by pumping liquidity into the financial system.

Central banks in Europe, the United Kingdom and in Asia have unveiled similar measures, and as side effects to such monetary stimulus policies, paper currencies weaken and stock prices rise.
Still, stimulus measures can only do so much, and stocks cannot sustain their gains if companies don’t see fundamental improvements taking place in the economy.

“The honeymoon period for markets is over. There is a realization that central banks have laid their cards on the table now and not much more can be done to help growth,” said Justin Harper, Market Strategist at IG Markets in Singapore, according CNBC.

“Looking at the hard cold facts, economies globally are still struggling to recover. While markets remain toppy, more sell-offs could be on the cards as investors fail to find a new catalyst to drive equities higher.”

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

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