Tempest Under Flat-Market Surface Has Stifel Putting on Hard Hat

Stock prognosticators make names for themselves with bold calls that predict bear markets or huge rallies.

Yet three of the 21 Wall Street strategists surveyed by Bloomberg made what may be even bolder, albeit more boring, calls at the start of the year: forecasting the S&P 500 wouldn’t do much of anything.

Gina Martin Adams at Wells Fargo & Co., David Bianco at Deutsche Bank AG and Barry Bannister at Stifel Nicolaus & Co. all predicted the S&P 500 would end 2014 at 1,850. Today’s rally notwithstanding, those calls look prescient so far. The index closed 2013 at 1,848.36. Yesterday it ended at 1,849.04.

Bannister’s rationale was that investors would sit on their hands while watching to see how smoothly the economy could stand on its own as the Federal Reserve withdrew stimulus. He’s sticking with his 1,850 prediction and has an update on prospects for the economic “hand-off” from the Fed.

“For now, we would describe our stance as pensive but optimistic,” he wrote in a note he forwarded today. “We do not know how smoothly this hand-off will occur. But sense that it is coming.”

Flock of Swans

A veritable flock of black swans have flown into the engines of the S&P 500 over the last five years, yet it still ascended to almost triple its level from the depths of the bear market. Europe’s debt crisis, the Fukushima nuclear disaster, Hurricane Sandy, Ukraine, Egypt, Syria, Libya -- the list is long and none of it seemed to matter in the long run for a market helped by an accommodating central bank.

The flattening of the market this year masks dynamic action under the surface, including a plunge in high-flying growth stocks that had helped lead the rally. The Nasdaq Biotechnology Index sank as much as 14 percent from Feb. 25. The Bloomberg IPO Index of companies that recently went public slumped more than 5 percent. The Russell 2000 Index of smaller companies and the Nasdaq Composite Index each lost almost that much during the month.

To Bannister, the drop in the so-called momentum stocks foreshadows weakness that will lead to more accommodative central bank policy around the globe. As the speculative trades like biotech become less appealing, it means he likes the old-fashioned cyclical growth names: energy and raw-material producers as well as heavy-industry companies.

“We spot a global cyclical trade, to the detriment of momentum trades,” Bannister wrote.

In other words, it’s time to take off the lab coat and put on the hard hat.