Wells Fargo’s House Divided as Bears Battle Bulls in Stocks

  • Bond team: S&P 500 could test key Fibonacci retracement level
  • Stocks strategist: S&P 500 Index will end year at 2,245

Wells Fargo & Co. says this year’s selloff in stocks is unlikely to halt the seven-year bull market. Wells Fargo & Co. also says the Standard & Poor’s 500 Index will probably tumble 26 percent from its May high.

At the world’s largest bank by market value, it depends on whom you ask. To bond strategist Richard Gordon, prospects for slower growth and maybe a recession are setting the stage for a trip to about 1,573 in the benchmark index. He offered that view a day after Wells Fargo’s equity forecaster, Gina Martin Adams, said the 2016 selloff poses a limited threat to the longer-term uptrend in stocks. The S&P 500 fell 1.2 percent to 1,881.09 as of 3:55 p.m. in New York.

Different teams, different ways of looking at things, Gordon said by phone.

“I don’t ever want to be an equity analyst or strategist -- Gina’s great at it,” Gordon said in a phone interview. “What I care about is if we have markets that are correlated to the stock market, and stocks are going to be weak this year, it’s very difficult for fixed-income risk markets to be strong.”

Price charts point to what “feels like a bear market” now and if Gordon were managing a long-only portfolio or working as a proprietary trader, he’d adjust strategies accordingly, he said. “This year is going to be a negative year for the stock market -- I look at it as risk-on and risk-off.” To assess the magnitude of potential losses, the bonds team examined declines that mirror numerical sequences that a subset of analysts consider relevant, the Fibonacci series.

“For investors who believe that Fibonacci retracements have some validity, it is a sobering reminder of the potential for a deeper price correction within the context of a multi-year bull market,” they wrote. “There is a reason stock prices have peaked, and for the past three months have trended lower.”

The so-called Fibonacci 23.6 percent retracement level -- about 1,788 for the S&P 500 -- has been tested twice since the market peaked in May 2015, while a 38.2 percent retracement -- about 1,573 -- “will get tested at least once in the coming months,” the strategists wrote. That represents a decline of more than 16 percent from the benchmark’s current levels.

That’s considerably more bearish than any other strategist is forecasting for year-end estimates. Martin Adams sees the S&P 500 reaching 2,245 within the next 12 months, an increase of about 20 percent from current levels. That puts her forecast among the top five most-bullish from 20 firms tracked by Bloomberg. The median forecast of these strategists calls for the benchmark to close the year at 2,200.

For Martin Adams, a combination of fundamental and technical analysis leads her to see current turmoil in markets as more reminiscent of the 1997-98 period, when the U.S. avoided a recession, versus the 2008 financial crisis when the economy contracted. She’s also eyeing the so-called head-and-shoulders pattern in indexes like the equal-weighted S&P 500 and the Russell 3000, which leads her to a different bottom for stocks.

The S&P 500 will likely slip below 1,800, potentially as low as 1,780, before recovering, she said.

“That level is consistent with a view that the long-term bull market trend doesn’t necessarily end; it corrects the excess we had,” Martin Adams said by phone. “There is a lot of chatter out there right now about whether the U.S. economy is headed into a recession. It’s not yet our forecast.” If it did happen, “it’d be a really unique occurrence because it’s never happened where falling oil prices created a recession.”

In her note Monday, she said selling that erased as much as $2.7 trillion from American equity values in the first week of 2016 reflected the withdrawal of Federal Reserve stimulus and oil’s plunge -- neither of which should cause a recession.

“Fundamentally, we still see this as an opportunity to add cyclical exposure,” she wrote.

On Tuesday, JPMorgan Chase & Co.’s Dubravko Lakos-Bujas cut his forecast for U.S. stocks by 9.1 percent to end the year at 2,000, saying heightened market volatility could damage the broader economy and bring about an earnings recession. That made JPMorgan the most bearish on American stocks for this year.

“I tend to look at everything from the top down,” Gordon said. As for where the market will end the year? “I don’t know. If I knew that I’d be retired and on top of a mountain in Colorado,” he said. “What I do know is you need to have a strategy before it happens. The market’s not acting like a bull market right now.”

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