The Fed is “likely to keep the balance sheet static after they stop expanding in June,” said Knapp, head of U.S. equity strategy at Barclays Capital, in an interview today on “Bloomberg Surveillance” with Tom Keene. “In the September to November time frame, they’ll allow it start contracting, and that will be the necessary condition to trigger an equity market correction.” A correction is often defined as a 10 percent decline in benchmark indexes.
The Standard & Poor’s 500 Index has rallied 4.9 percent since Nov. 3, when the Fed announced $600 billion of bond purchases through June to boost growth in the U.S. economy. The benchmark gauge for U.S. stocks has slipped more than 6 percent since mid-February as revolts in the Middle East and northern Africa sent oil prices higher and Japan’s biggest earthquake on record struck the northeast of the country on March 11.
Thomas Lee, equity strategist at JPMorgan Chase & Co., and Mary Ann Bartels of Bank of America Corp. were among analysts who said this week that the recent slide in the S&P 500 may be a buying opportunity. JPMorgan’s Lee predicts the S&P 500 will advance to 1,425 by the end of 2011.
‘Much Better Spot’
While the risks from higher oil prices and damaged nuclear reactors in Japan are worse than the circumstances last year when the market fell 12 percent from April 23 through May 20, “policy is in a much better spot” now, according to Knapp. Stocks will likely maintain gains when the Fed exits the so- called quantitative easing program in June, and will correct in the September to November time frame, Knapp said.
“We’re likely to have an equity market correction somewhere during the exit-strategy process,” Knapp said. “We don’t think it’s right at the point where they stop expanding the balance sheet. We think it’s when they start letting the balance sheet contract at least passively.”
The S&P 500 fell 2 percent to 1,256.88 at 4 p.m. in New York. Knapp forecasts the benchmark gauge for U.S. stocks will climb to 1,450 by year-end 2011. That compares with the average estimate of 1,400 by 13 strategists surveyed by Bloomberg.
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