Wall Street rally seen through Q1 2011: Citi

By Steven Scheer

JERUSALEM (BestGrowthStock) – U.S. stocks (Read more about the stock market today. ) are poised to continue rallying through next March, although Wall Street should ease somewhat following mid-term elections next week, Citigroup’s chief U.S. equity strategist said on Monday.

“Near term, the market looks good through the first quarter of 2011,” Tobias Levkovich said in an interview with Reuters.

U.S. stocks (Read more about the stock market today. ) gained for the third straight week last week, with the Dow Jones industrial average (.DJI: ) reaching 11,132.56 and the Standard & Poor’s 500 Index (.SPX: ) hitting 1,183.08.

Levkovich sees the Dow Jones at 11,150 and the S&P 500 at 1,175 by the end of 2010 — rising to 12,200 and 1,300, respectively, in 2011.

More than likely, stocks will slip following elections next week, no matter what the outcome brings, he said.

Along with anticipation of further easing measures by the Federal Reserve to stimulate the struggling U.S. economy, the market’s recent rally has been fueled by expectations that Republicans will win the House — a view investors see as positive since that would likely indicate a more pro-business stance in Washington.

Also, “If Republicans take the House, there won’t be increased spending programmes to blow up the deficit,” Levkovich said during a trip to Israel. “If that doesn’t happen (and Democrats retain control), markets may take that badly.”

Even if Republicans are victorious, Levkovich said the market is headed for a dip on the premise of “buy the rumor, sell the fact.” But after the November drop, he expects a rebound in December through year-end.

Political issues will remain a key factor for Wall Street in 2011, particularly Bush-era tax cuts that expire at the end of 2010. “The market will want clarity on that,” Levkovich said, expecting Congress to ultimately approve a two-year extension for Americans earning less than $1 million a year.

2011 TO MIMIC 2010

Citi forecasts U.S. economic growth of 2.2 percent in 2011 but “if Bush tax cuts expire, at least 1 percent gets knocked off that forecast,” he said.

For the time being, sentiment is still positive in the market “but that doesn’t preclude a pullback,” he added.

“2011 will mimic 2010 — a strong beginning, a weaker middle and a recovery later in the year,” Levkovich said, predicting markets will gain about 10 percent next year following an expected 7-8 percent rise in 2010.

Levkovich sees earnings per share growth gain in 2011 of 7 percent, after a 36 percent jump in 2010.

Money continues to leave the equity market in favor of bonds and other assets investors see as less risky.

“We went through two, 50 percent-plus declines in two years so investors are bummed out in stocks,” Levkovich said.

He called the flows into bonds “silly” since either the budget deficit will blow out or there will be inflation and interest rates will rise. “So, there is risk in bonds,” he said.

But while retail investors are unwilling to buy stocks and pension funds are low in their equity allocations, corporates are active in the stock market.

Levkovich said he doesn’t like tech stocks, especially semiconductor companies, as well as food, beverage, tobacco, media, transportation and autos. Sectors he likes include financial services — banks and insurance companies — capital goods, pharmaceuticals, energy and consumer services.

The next bull market in the U.S. isn’t expected until 2012-2013.

Levkovich doesn’t see himself as a bull or a bear, since those classifications are too rigid in his mind. “I am a little bit of both,” he said.

(Editing by Erica Billingham)

Wall Street rally seen through Q1 2011: Citi