Reading the Equity Tea Leaves

What happens during the year after the year that stocks fall 40 percent? That's the nagging question everyone wants answered as we begin to close out 2008 and set our sights on a more hopeful 2009 for our portfolios.

The good news is a lot of economists and money managers believe that stocks will rebound next year, although few believe they'll reach their highs. The bad news is that they still could all be wrong.

The folks at Standard and Poor's expect corporate earnings to begin improving by the second half of next year. Sam Stovall, S&P's chief investment strategist, puts his target for the S&P 500 index at 1025 at the end of 2009, a 20 percent gain from where he expects it to close next week.

If this bear market hit bottom on November 20, when the S&P sunk to 752, history says next year could be a good one for stock returns. Stovall points out that during the first year of every new bull market since 1932, stocks rose by 46 percent of average.

Barron's asked twelve investment managers for their forecasts and their predictions averaged out to an S&P 500 index at 1045, not far off from Stovall's forecast. It's worth noting that the most bearish of the bunch -- Alison Deans of Neuberger Berman -- thinks the S&P will close next year at 950. That's still about 9.5 percent above today's levels.

Of course, none of these targets are achievable if investors don't believe in stocks, and that's precisely the scenario the Wall Street Journal lays out on its front page today. After past downturns, many investors were left feeling so burned that they chose to sit out of stocks entirely for the first few years after. In fact, investor confidence in stocks has never returned to its pre-2001 levels, based on the level of inflows to mutual funds.

by Megan Barnett