Is it 1931 or 1983? The bulls see the market mimicking 1983, the bears point to 1931. Those in the middle see many similarities with 2004. Barron's Michael Santoli reports. Not that 2010 is likely to disappoint. "We're back to an environment where the fundamentals have to come through," Doll said. "Companies have to deliver the earnings. When it's an earnings-driven market, there are gains but more muted gains."
Indeed, the biggest difference could be that stocks in 2010 are founded on tried-and-true measures -- financial strength, earnings power -- rather than high-octane speculation. That would favor big multinational firms in cyclical and growth industries that stand to benefit from economic improvement, namely technology, energy and industrials.
Technical and historical factors are at work as well. Sam Eisenstadt, former research chairman at Value Line Inc. and a veteran market observer, wrote in a recent MarketWatch commentary that evidence points to an above-average 2010 for stocks.
"After the first nine months of the stock market's rally from recession lows, the average pace of the stock market's advance clearly slowed," he noted. "But, and this is crucial, the market tended nevertheless to continue rising." He pegs the S&P 500 at 1320 by year-end.
MarketWatch commentary. This year the bulls have a good chance to retain the upper hand, though not without setbacks, and investors will have to be more selective. In that light, here are 10 ways to position your portfolio through 2010:
1. Buy stocks with a global footprint
In a slow-growth environment, bigger is better. Big companies have the clout to counter adversity and capitalize on it. "Bigger" in this case also refers to companies of any size with a broad global presence. Global companies have diverse revenues and operations, which both insulates core businesses and fosters innovation and expansion.
U.S. companies in the past decade have been impressive examples of how to operate effectively overseas. Moreover, these companies are exporting their business to fast-growing emerging markets. Almost half of the revenues for companies in the Standard & Poor's 500 stock-index now come from outside of the U.S.
"The demonstrated ability of S&P 500 companies to replicate their business [overseas] and earn attractive margins and returns abroad is the most important development of the decade," wrote David Bianco, Bank of America Merrill Lynch's chief U.S. equity strategist, in a December report.
"The global economy is going to continue to integrate," added Gary Motyl, chief investment officer of Franklin Resources' Templeton Global Equity Group. "Companies that have the best managements, strategies and balance sheets are going to take advantage of this." He said Pfizer Inc., is a good example. "What isn't reflected in the stock price," Motyl said, "is this company's ability to move into the emerging markets."
2. Use stock dividends as a bond substitute
Shares of companies with strong balance sheets and stable earnings growth are not only better-equipped to handle the economy's waves, but their dividend income is a welcome alternative to the uncertainty swirling around bonds.
"Current dividend yields relative to bond yields provide an attractive opportunity for investors," wrote Brian Belski, chief investment strategist at Oppenheimer Asset Management, in a recent research report. "A prolonged period of low bond yields may encourage investors to begin seeking alternative ways to increase income, and high-quality, dividend-paying stocks may be a solution."
Oppenheimer's recommended stocks fitting this bill include Johnson & Johnson, AT&T ( Bill Wright suggest Exxon, VZ, LLY, MO, PFE, VOD and DT at todays prices)
3. Buy larger-cap index funds
Large-cap stocks lagged their small-cap and midcap counterparts in 2009, but many observers say that big firms' time has come.
"Large, blue-chip companies are the last remaining pocket of undervaluation," said Keith Goodard, co-manager of Capital Advisors Growth Fund. "A basket of blue-chip companies with a 3% to 4% dividend is not a bad place to be."
If larger-company U.S. stocks outperform small-caps, then shareholders could do well holding index mutual funds and exchange-traded funds that track plain-vanilla, large-cap benchmarks such as the S&P 500, the Dow Jones Industrial Average .
Many S&P 500 companies, for example, provide global exposure, high-quality earnings, seasoned management and attractive dividends -- attributes that investors could increasingly value as the year unfolds.
"We believe that 2010 will be another positive year for stocks, and we established a 2010 price target of 1,300 for the S&P 500," Oppenheimer's Belski said. That would mean a gain of almost 14% for the index from Friday's close of 1145 -- a standout return for the market.
4. Stick with technology stocks
Technology funds were the best-performing U.S. sector in 2009, up about 63%, and technology is again the largest S&P 500 component. ( Bill Wright says buy intel on the pull back, even Dell at todays prices)
That's a cautionary note, but the sector's earnings prospects are nonetheless strong. S&P analysts are among those upbeat on tech stocks. "The sector is poised to benefit from a healthier global economy, a notable PC replacement cycle and considerable international exposure," the analysts noted in a recent report.
"They've got robust balance sheets, phenomenal free cash flow, and while the stocks have done well and valuations aren't as cheap, there is room for them to outperform," BlackRock's Doll said of the tech sector. He favors computer software and services companies over hardware and semiconductor firms, namely Microsoft, IBM and Oracle
5. Plug into the energy sector
Energy stocks have been on a tear so far this year. Energy-sector mutual funds are up almost 7% on average, on top of a 46% gain in 2009, according to investment researcher Morningstar Inc. The energy bulls are banking on a continuing global recovery and strong emerging-market demand, and strategists at Bank of America Merrill Lynch are squarely in that camp.
"Energy is our preferred global recovery play" and could be the year's best-performing sector, depending on oil prices, Merrill strategists wrote in a recent research report.
S&P analysts are also bullish, particularly for companies in the integrated oil and gas industry. But it's a tempered call that hinges in part on the global economy making a smooth transition from one that has relied on government stimulus to one that is earnings-driven. S&P's favorite energy stocks include Chevron Corp., Exxon Mobil Corp. and Superior Energy Services Inc.
For more market news and education go to Window To Wall Street®.
Note: Small investors should always first consider the benefits of a professionally managed (or unmanaged index) diversified mutual fund portfolio over owning individual stocks and bonds. All investing can result in losses.
Disclosure: At the time of this blog post I hold positions in the following stocks discussed in this article: Exxon, Lilly, Verizon Wireless, Vodafone and ESV.
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