US stocks have likely seen lows

By Ros Krasny

NEW YORK, Dec 8  - U.S. stock markets have likely made their cyclical lows but still face months of volatility as investors contend with a drum-beat of poor economic news, several top money managers said on Monday.

But even as equity markets turn, gains are likely to be more modest than in some past rallies because economic growth will be tempered by the emergence of a less leveraged U.S. economy, they told the Reuters Investment Summit in New York.

The market shows signs of a classic bottoming pattern after a decline on Oct. 10, when the S&P 500 capped its worst week ever, was followed by a steep intraday loss on Nov. 21, but with lower volume and fewer stocks making new lows, said Bob Doll, global chief investment officer for equities at BlackRock.

"The economic news will be bad for months to come. But markets bottom before economies do," Doll said.

Stock market bottoms during recessions "tend to last three to six months. Thus, we may have one to four months to go," he said.

On Monday, the Dow Jones industrial average climbed 3.4 percent to close at 8,934 points, after briefly hitting the 9,000 point level for the first time in a month. And the broad S&P 500 pushed into positive territory for the month.

The Dow has closed higher in four out of six sessions since the National Bureau of Economic Research said the United States entered a recession in December 2007, making it already the third longest downturn since World War Two.

Along the way, markets absorbed a bleak November jobless report on Friday that highlighted the fragile state of the consumer-dependent economy.

Margaret Patel, senior portfolio manager at Evergreen Investments, said that historically stocks have bottomed six months before the "real economy" does.

"We're still in a choppy bottoming phase for equities," she said, adding that investors are "getting very close to saying it's not the end of the world."

Many companies responded more rapidly than expected to the economic downturn, putting "downcycle disaster plans" into action even before profits fell off much, Patel said. "Once they see the economy is stabilizing these layoffs might taper off quite quickly."

The end of the "strange inflection period" between administrations will also have a positive impact on the market, she said.

"The missing piece has been fiscal stimulus, and the new administration has suggested it will be aggressive."

With consumers still tapped out, though, there is limited ability for the economy, or the stock market, to rapidly ramp up, Patel said.

Investors on Monday jumped on stocks they hoped would get a boost from President-elect Barack Obama's proposal for the most ambitious federal works project since the interstate highway system was constructed in the 1950s. Shares that rode higher on the wave of optimism included construction equipment maker Caterpillar Inc <CAT.N> and Terex Corp <TEX.N>, a maker of mining and building equipment.

Doll, though, suggested that investors should take a serious look at companies in the energy, health care and technology sectors.

SEVERE DOWNTURN ALREADY FACTORED IN?

Whitney Tilson, founder of the New York-based hedge fund T2 Partners LLC, said markets had already discounted the "very severe recession" that appears to have overtaken the U.S. economy.

"There's a lot of upside in some individual stocks and sectors. I'm really quite bearish on the macro outlook, but quiet bullish on certain sectors and certain stocks," including selected energy stocks, he said.

Tilson said the U.S. economy would almost certainly shrink in 2009 and spend 2010 hobbling along at a low level of growth before conditions start to trickle up in 2011.

Legendary hedge fund manager Michael Steinhardt was less certain that November levels marked the ultimate low for equities, but said it would be a good cyclical time to invest in stocks.

"I don't think that this is the bottom, that we've hit the bottom, although it wouldn't shock me if it were the bottom," said Steinhardt, whose Steinhardt Partners fund delivered a 24.5 percent annual return over fees for almost three decades before he closed it in 1995.

"I think now would be a good cyclical time to go into equities, wouldn't you?"