Douglas Kass, the money manager who recommended buying stocks when the market bottomed in March 2009, said the Standard & Poor’s 500 Index will rally 5.1 percent through the end of the year as European policy makers work to solve the debt crisis and U.S. economic data improve.
Kass raised his fair-value estimate for the S&P 500 to 1,325 from 1,270, lowered his projected odds for a 2012 recession to 20 percent from 30 percent and said there’s zero risk of a deep economic contraction. He said investors should have 75 percent of their assets in stocks, up from a prior recommendation of 50 percent. The S&P 500 added 0.6 percent to 1,261.12 yesterday.
“I am now much more responsive to long investment ideas than at any time in the last year,” Kass, the Palm Beach, Florida-based founder of Seabreeze Partners Management Inc., said in a note to clients yesterday. “I have grown more optimistic as the fundamental, valuation, technical and sentiment factors seem to have aligned to be supportive of higher stock prices,” he said. “I am pleased to have rejoined the investment land of the living.”
Kass took action after the S&P 500 surged 11 percent in October, the biggest monthly advance since 1991. The money manager said he’s been “cautious and underinvested” for most of 2011, a year in which the stock index was down as much as 13 percent. Kass grew more optimistic after European leaders announced plans to expand their bailout fund and Congress created a supercommittee to reduce the U.S. budget.
U.S. stocks advanced today as Prime Minister Silvio Berlusconi’s offer to resign boosted optimism the nation will appoint a new leader who can tame the debt crisis. The S&P 500 advanced 1.2 percent to 1,275.93 today.
The money manager said in a Bloomberg Radio interview on March 9, 2009 -- the day the S&P 500 fell to a 12-year low before rallying as much as 102 percent -- that the market was in a “bottoming process.” He recommended that investors “take a rather broad position in equities.”
Kass said at the end of last year in his 15 predictions for 2011 that the price of crude oil would rise above $125 a barrel, while the yield on 10-year U.S. Treasuries would surpass 4.5 percent. Oil hasn’t traded above about $115, and the rate on the government debt has ranged between 1.67 percent and 3.77 percent.
The S&P 500 slid 14 percent in the third quarter, its worst period since the end of 2008. After closing within 1 percent of a bear market, or a 20 percent plunge from its high in April, the benchmark gauge climbed 11 percent last month after European leaders agreed to expand the region’s bailout fund and American economic growth accelerated.
The index gained yesterday as the European Central Bank’s Juergen Stark said the region’s debt crisis will be under control in two years.
“The world’s economic recovery is imperfect, and with the U.S. economy exhibiting only moderate growth, there is little margin of safety for exogenous shocks,” Kass wrote yesterday. “But that imperfection and vulnerability are now universally recognized (contrasted with the optimism that existed a year, six months and three months ago) and are arguably reflected and more than discounted in reasonable/current valuations.”
The investor said in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Ken Prewitt on Sept. 21 that he recommended long-term investors take “a very defensive position” by allocating 50 percent of their assets to equities and the rest in cash. The index has rallied 4.9 percent since then.
“I do not feel as though I am paying up for stocks today,” Kass wrote yesterday. “Color me more bullish.”