U.S. stocks may extend their rally by 30 percent this year as investors move money from bonds into stocks on growing confidence about the economy, said Michael Gayed, chief investment strategist at Pension Partners LLC.
“There’s a lot of scared money in bonds and defensive stocks,” Gayed, who helps oversee $160 million, said in a phone interview from New York. There may be “a major flow into risky assets as investors start to believe in the return of inflation which, in turn, will change how equities are perceived.”
Inflation expectations have climbed this year, bond prices show. The yield difference between five-year inflation-linked debt and comparable maturity Treasuries was 2.16 percentage points on March 16. The rate, a measure of the outlook for consumer prices over the life of the securities, has climbed from 1.53 points on Dec. 16.
“The market sensed very early in 2012 that deflation risks were no longer a concern,” Gayed said. “Those sectors most sensitive to inflation started showing strengths, and leadership in those areas looks likely to continue as more and more investors believe in the inflation theme.”
The Standard & Poor’s 500 Index (SPX) has rallied 11 percent since the beginning of the year and has surged 27 percent from its October 2011 low amid better-than-forecast economic and company earnings data. Global equities have gained about $5.2 trillion in value this year.
Financial Sector ‘Key’
Banks and financial companies, which have jumped 20 percent as a group, have led this year’s rally.
“Financials are the key to everything,” Gayed said. “If banks are telling you things are OK through dividend increases and stock buybacks, it’s an automatic sign the financial crisis is coming to an end and that they see an improvement.”
The Federal Reserve this month said 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a severe recession scenario that assumes they continue to pay dividends and buy back stock.
“It’s hard for anyone to argue that markets will drop significantly this year,” Gayed said. “Almost everything people were afraid of happened. In the eyes of many investors, Greece defaulted. Italy’s bond yields reached record highs. And despite no conviction by investors and continued skepticism, the markets have continued to rally.”
Gayed, who predicted in June 2011 that the market would post “a significant decline,” said he expects “anything consumer-related” to catch up with the rally in the second-half of the year.
“Everyone is talking about a hard landing in China,” Gayed said. “They’re using that as an excuse for a correction. A correction, if there even is one, would be minimal and shallow at best.”
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