At least one analyst is calling for a significant correction in the market between now and the end of the year even after the Fed announcement that tapering will wait a bit.
From CNBC via Yahoo Finance:
Gina Martin Adams is sticking to her guns.
The Wells Fargo strategist has been bearish on stocks all year, even as she watched the S&P 500 (^GSPC) add 21 percent. And on Thursday's " Futures Now ," Adams reiterated her call that the index would close out the year at 1,440.
"Our target is based on fundamentals," Adams insisted. "We're basing our target on typical valuation measures, given the level of interest rates and also on earnings forecasts. And that's why our target is relatively low."
That means she expect the market to lose about 16 percent post the last FOMC meeting.
I'm not a doom and gloom guy when it comes to stocks. Hence we always look at the fundamentals and the technicals on INDIVIDUAL EQUITIES on Ransom's Stocks in the News.
But I do think there is reason to be cautious generally here.
As Adams explains much the run up in stocks this year isn't due to earnings growth, it's due to investors willing to pay a bigger premium for stocks.
"It's all about emotion at this point. The entirety of the S&P 500's increase this year has come via the multiple," Adams said. "It's been simply through the amount that investors are willing to bid up the value of the future earnings stream."
As CNBC explains, the price/earnings ratio for the S&P 500 started the at 17 times earnings. Now it's nearly 20.
The multiple is one of the most valuable components" of the rally, and "typical drivers of the multiple are interest rates." So despite the fact that yields have cooled off recently, "simply the fact that we moved from 1.6 [percent] on the 10-year Treasury rate to now the 2.7 [percent] range is a potential tremendous shock over the next six months," Adams contended.
Adams believes that stocks haven't yet digested the rate rally. "Stocks tend to follow rates over time," she said. "Typically, when you get a 100 basis point [or 1 percent] move in Treasury rates, you get a contraction on the P/E multiple on stocks of about a full turn. That, by itself, implies you get something of a 10-percent-plus correction in stocks."
As I wrote on 9/11, I thought that the disparity between rising interest rates and a rising stock market meant either the bears on bond or the bulls on stocks are wrong.
With the close at 2.96% that means that the 10 year treasury rates have gone up 100% since May.
And sure some of that is taper talk, some of that Syria, some of it's uncertainty. But that kind of movement in the 10 year treasury market- the benchmark off of which other interest rates are posted- does not portend well for the stock market.
The stock market follows the bond market. Watch where the bond market's going and you'll have a good idea where the stock market will eventually be.
One of the great dramas between now and the end of the year will be which side turns out right. Just make sure you're the one with the popcorn, not the one with one of the leading roles in the developing tragedy...for someone.
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