Is the Immediate Future Pessimistic for the Stock Market? Goldman Sachs predicts a gloomy situation for the stock market ahead, but there isn’t pessimism all around.
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In stock trading, it is necessary to have a landscape view of things. Sometimes, expert analyst and investment manager predictions need to be examined too for trends that may not seem currently obvious.
The Pessimistic Figures Aren’t Baseless According to Goldman Sachs ($GS), the stock market could plunge by a massive 25% as a result of the yields soaring. If the 10-Year US Treasury Note yield touches 4.5%, Bloomberg reports Goldman Sachs predicting that the S&P 500 Index (SPX) could end 2018 by up to 25% below its January 26 record high close. The S&P 500 would then come down to 2,155, and Bloomberg reports that this would be 21.5% below the February 27 close. The Investopedia article quoting these sources maintains that this situation could well end up happening. There is a vigorous economic growth happening globally. This creates inflationary pressures which the Fed wants to deal with in the manner of interest rate hikes. The Fed also wants to bring down the huge balance sheet it’s added up, so that would mean reduced bond prices and raised yields. According to the Investopedia Anxiety Index (IAI), there is still extreme worry regarding the securities markets, while the 10-Year Treasury Note managed to yield 2.9% at the close on February 27.
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Goldman, in its February 16 US Weekly Kickstart report, has a base case prediction that the 10-Year Treasury Note would yield 3.25% by 2018 year-end and 3.60% by 2019 year-end. Goldman also has a projection of the S&P 500 ending 2018 at 2,850, a 3.9% gain from the close on February 27. Goldman recommends investors to get hold of the S&P 500 while selling the 10-Year T-Note.
Dealing with the Situation According to an expert, Sit Investment Associates’ senior bond portfolio manager Bryce Doty, the stock market is going through a reactionary stage against the changes happening in the bond market, and the 10-year yield at four-year highs now is proof of that. The highs in bonds and yields are making the market react to them since the stock market usually has the tendency of selling off and generating a quality drive, sending the yields down. But all that has changed now. Doty is apprehensive about this environment, calling it “dangerous” and “uncertain”. He has a fearful anticipation about federal budget deficits as a result of spending increases and tax cuts, with the Fed’s intentions of reducing its balance sheet. This year Doty is expecting the Fed to increase rates four times, which is one more than what they’ve officially forecasted.
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According to Doty’s recommendations, investors shouldconsider hedging with bond futures contracts’ short sales as a means to productively deal with the fear and generating “cheap insurance”. And let’s not forget that Bill Gross, the bond fund manager, and Alan Greenspan, former Fed chairman have warned about the stocks being raised up artificially with the Fed’s and other central banks’ low interests rates.
There Is Still Plenty of Optimism Around But things are not all that negative. There are positive-sounding voices too. According to Credit Suisse’s chief equity market strategist Jonathan Golub, rates rising from 3% are good since he considers 3.5% a kind of a neutral positioning for stock prices. But when they rise from 4%, they become a problem. Golub is of the opinion that the stock market correction we witnessed recently is influenced by general inflation and wage hike concerns. This reduces profit margins for companies and raises costs. He reminds that these, and not rising yields, are the factors influencing the correction. He’s also of the impression that the S&P 500 could have a 5% to 6% progression even though yields increase by a measure of 50 to 60 basis points. JPMorgan Chase ($JPM) strategists believe that the present equity valuation multiples in the region of 18 times forward www.tradezero.co
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earnings can be sustained if the interest rates stay below 4%. BMO Capital Markets’ ($BMO) chief investment strategist Brian Belski believes that stocks, at their current levels, will not be hurt by rising rates. The increase in rates is a consequence of the increased earnings and the resultant rise in the stock market, Belski says. He calls it a “circle”, meaning the natural way things move around. So perhaps the pessimism isn’t fully justified. Watch this space!
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