Low expectations mean high upside surprises possible, says Schwab’s Samra

Low sentiment could mean positive surprises, according to Kully Samra, UK branch director at Charles Schwab.

Despite an October rally that saw the best monthly gains for the S&P index since 1991, US investor sentiment remains depressed. Expectations for future growth and the solving of the crisis situation still remain low, but this provides an opportunity for positive surprises.

Although we have seen economic data steadily improving in the second half of 2011, growth forecasts remain muted.  In the US, the holiday shopping season is ongoing, and ISI Research notes there is an 89% correlation between holiday sales and stock market performance between September and December.

Despite wavering consumer confidence, demand does seem to be improving. But we do not see robust growth in the near future as headwinds remain.

However, despite potential supply disruptions due to the flooding in Thailand and continued consumer deleveraging, which tends to reduce disposable income, we do believe some growth in the economy is in store. There are also signs of healing in the jobs market.

However, at the Fed’s meeting on 2 November, concern continued to focus on the weak jobs growth. Despite the promise of future quantitative easing if deemed necessary, and the introduction of ‘Operation Twist’, in reality we do not believe the Fed has the tools required to turn around much of what is holding back economic expansion.

We also think setting expectations that interest rates will remain historically low for the next two years is not particularly helpful. With historically low rates, investors, consumers and businesses have little incentive to move quickly on purchases requiring borrowing.

Whereas if investors, consumers and businesses alike faced the prospect of rising rates, there may be some incentive to move sooner rather than later, which would help to get money moving through the system again.

The market is not out of the woods yet. However, we think rallies may be more likely than corrections in the near term. Despite ongoing challenges, the expectations bar has, arguably, been set low enough to be hurdled easily. 

Kully Samra is UK branch director at Charles Schwab

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