Most Bullish Stock Strategist Downplays Risk of 50% DropMichael P. Regan
Here’s a warning you probably wouldn’t expect to hear from the most bullish strategist on Wall Street: the chance of a 50 percent plunge in stocks.
Yet that is the peculiar dichotomy Barry Bannister of Stifel Financial Corp. presented today in a report. With a year-end projection of 2,375 for the Standard & Poor’s 500 Index, implying a 15 percent gain in 2015, his is the highest among 19 forecasts tracked by Bloomberg.
That estimate, obviously, implies that he’s not overly concerned about the possibility of a 50 percent drop. Yet the risk exists, Bannister warned, if the Federal Reserve “repeats its 1936-37 errors” by ignoring threats from overseas economies and tightening monetary policy too soon. It would only take an increase in the real fed funds rate to 1 percent to do it, in Bannister’s view.
It’s “very improbable the Fed over-does it in 2015,” Bannister wrote in an e-mail today. “So I think we’re all right.”
Still, the opposing prospects for the market detailed by Bannister highlight the various unanswered questions facing investors as 2015 presents itself. From the timing and pace of U.S. interest-rate increases amid potentially looser monetary policy in Europe, to the net effects on corporate earnings from plunging oil prices, a surging dollar and a dismal overseas economic outlook, quant models contain important blank spaces that are being filled with guesses.
Perhaps then it’s not surprising that the well-advertised return of volatility is upon us, with the S&P 500 moving an average of almost 1.1 percent a day so far in 2015, shattering the tranquility seen last year when moves were half that size in the calmest year since 2006.
At Leuthold Group in Minneapolis, chief investment officer Doug Ramsey is going on the record with a warning that is less ambiguous: U.S. stocks have begun a topping process and will endure a cyclical bear market of 25 percent to 30 percent either this year or next.
Ramsey lists several reasons for making the bearish call, but here are a few:
While 2015 may provide a “steady stream of excuses” for the Fed to resist raising rates, small caps, consumer discretionary stocks and emerging markets all behaved like last year’s tapering of central bank stimulus amounted to tightening of policy. “Waiting for a formal, 25-basis point (or less?) bump in the Fed funds rate might prove costly,” he wrote.
Yield spreads on junk bonds have shown little recovery after steep gains in previous months, “a pattern also observed in the months leading up to the bull market highs of 2007, 2000, 1998 and 1990,” Ramsey wrote. “Much of the spread blow-out relates to energy, but it doesn’t matter. In any cycle, junk underwriters are best at funneling capital to those industries on the cusp of destroying it.”
Excessive bullishness among newsletter writers, high price-earnings ratios and large put positions in stock-index options are some of Ramsey’s other reasons for being concerned. He’s also of the school of thought that the collapse of crude oil will end up being a net negative to S&P 500 earnings.
Still, according to Ramsey, the Dec. 29 highs in benchmark indexes mean these concerns may be a little premature and he’d like to see more “market buy-in” to the beliefs before taking the firm’s investments to a defensive posture of 30-35 percent net equity exposure from the current neutral position of 50 percent.
In other words, despite the turbulence, in Ramsey’s view it’s still too early to assume the crash position. You are free to walk around the cabin.