Friday's Rally Isn't an All-Clear Signal for Stocks: UBS

  • UBS strategist Julian Emanuel sees `weeks' before all-clear
  • S&P 500 caps first weekly gain of year with two-day rally

Two days were enough to make this the year’s first up week for U.S. stocks. But two days do not a recovery make, at least not to UBS AG.

The Standard & Poor’s 500 Index rebounded on Thursday and Friday after as much as $2.4 trillion was shaved from U.S. equities amid plunging oil prices and mounting concerns over China’s growth. Investors would be well advised not to treat the rebound as an all-clear signal, said UBS’s Julian Emanuel in an interview with Bloomberg.

“Are we calling an absolute bottom in oil? No, the same way we’re not calling an absolute bottom in the S&P 500,” said Emanuel, the New York-based U.S. equity and derivatives strategist. “A bottoming process is starting. To expect a complete turnaround is probably not correct. It will play out in weeks.”

The S&P 500 gained 1.4 percent to end the holiday-shortened week at 1,906.90, as optimism that central banks from China to Europe will broaden stimulus measure lifted stocks in the final two days by 2.6 percent. Energy producers in the index rallied 1.9 percent as higher crude prices bolstered last year’s most beaten-down industry. The Dow Jones Industrial Average added 105.43 points.

“The market is actually better off than people give it credit for,” said Kevin Kelly, the New York-based chief investment officer at Recon Capital Partners. “That doesn’t mean we can’t get lower because valuations are still high, but I don’t think you’re going to have a tail risk that’s going to catch people off guard.”

Trading this week whipsawed investors after the S&P 500 tumbled to a 21-month low, only to close in positive territory on Friday. The link between stocks and crude oil needs to weaken before investors see capitulation from the selloff, said Emanuel, whose forecast for the S&P 500 this year calls for a 19 percent gain from Friday’s close.

“What we want to see is a day when oil goes down and stocks don’t go down,” Emanuel said.

Southwestern Energy Co. and Consol Energy Inc. led gains in the S&P 500 this week, as energy producers accounted for the top seven biggest winners, buoyed by a rally of more than 9 percent in West Texas Intermediate.

Financial firms tumbled the most in the S&P 500 this week. American Express Co. fell 12 percent, its worst weekly performance since May 2009, after the company said profit fell 38 percent in the fourth quarter. Bank of America Corp. dropped 6.2 percent after saying it will struggle to increase revenue.

Volatility has swept up investors this year, with stocks alternating up and down days and swings wilder than usual. The average move in the S&P 500 from close to close so far in 2016 is 1.2 percent. That’s the widest they’ve been over a 14-day period since markets buckled in August and the benchmark tumbled into its first correction in four years.

The Chicago Board Options Exchange Volatility Index reached its highest level since September on Jan. 20, only to plunge 19 percent over Thursday and Friday.

Declines have sent the S&P 500’s valuation to near its five-year average -- a potential opportunity for investors, according to UBS’s Emanuel, the fourth most bullish strategist among 19 surveyed by Bloomberg. He forecasts a year-end target of 2,275, compared with the median of 2,200.

“Investors have to get used to a more volatile environment,” said Emanuel. “Sentiment has gotten so extreme that we think the mentality of selling the rallies will be called into question over the next few days. We see this as a window of opportunity looking out over the rest of the year.”

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