Experts predict what’s next in the financial world

NEW YORK – Two of the biggest questions on Wall Street are now settled: how power is divided in Washington and how big the Federal Reserve’s bond-buying stimulus program will be.

So what’s next? Here are predictions by a panel of experts.

• Jeffrey Kleintop , chief investment strategist, LPL Financial

The most important issue for this year and next will be the unemployment rate,” Kleintop says. “This election was about jobs.”

Kleintop predicts a rally for stocks that pay high dividends in industries like telecommunications and utilities. With large Republican gains in midterm elections, Kleintop anticipates that the lame duck Congress will be more willing to extend the capital gains tax cuts passed during George W. Bush’s time in office rather than let them expire at the end of the year. He also predicts that the dollar will continue to fall as the Fed attempts to spur spending by buying bonds.

Bottom line: He expects the stock market to return a high single digit percentage point gain over the next 12 months, in line with the 7.5 percent gain in the S&P 500 so far this year.

• Mark Vitner , chief economist, Wells Fargo

Vitner argues that the Republican takeover of the House of Representatives makes it more likely that President Barack Obama will move toward the center and that fiscal policy will dominate the political agenda.

“There’s been all sorts of discussion about the tea party and what it stands for,” Vitner says. “The central message they seem to represent is that we have to find a way to live within means.” Getting there, he says, will mean either new taxes or a series of painful spending cuts.

Vitner thinks that the stock market will do well in the first part of next year but will then hit a wall. “All of the problems that we have today will still be with us then,” he says. “In the best of all worlds we will be stuck with a very modest economic recovery with meager growth rates.”

Bottom line: No big gains for the stock market.

• Mohamed El-Erian, CEO, PIMCO

The head of global bond giant PIMCO fears gridlock in Washington won’t be as good for the markets as some investors think. In a note to clients, El-Erian wrote that gridlock only helps with “a private sector that is in good shape – businesses and households with robust balance sheets, positive cash flow and access to credit.”

That’s not the case now, he says. Corporations and wealthy households aren’t willing to spend cash on their respective balance sheets or take any risks.

For big gains in the stock market, Washington will need to find a way to clear up the debts still weighing down consumers.

Bottom line: A change in government doesn’t appear likely to solve the problems that the economy faces.

• Binky Chadha, chief U.S. equity strategist for Deutsche Bank

Once the market believes Washington is more moderate, Chadha sees cyclical industries doing best, as they usually do as an economy begins to grow. But he also sees gains for health care, which he calls the cheapest industry in the S&P 500. Chadha says most of the gains since the summer’s lows have been due to better-than-expected economic data, not from expectations about the election or stimulus from the Federal Reserve.

That explains why he’s so bullish.

Bottom line: He thinks the S&P 500 will end 2010 at 1,275 and end 2011 at 1,550, a 22 percent jump. It closed at 1,198 on Wednesday.