Seemingly unlimited Federal Reserve intervention in the market has put a firm floor beneath the S&P 500, but the rest of the year will be a bumpy ride, analysts say.
The Dow and broader U.S. stock market are riding high again, fueled by optimism that global central banks have unlimited ammunition to drive up asset valuations indefinitely. Citigroup agrees and has just upped its year-end target for the S&P 500. Even with the upward revision, the bank is calling for a steep decline from current levels.
Citigroup, one of America’s big four banks, has revised its year-end price target for the S&P 500. In a note to clients, the bank says the large-cap index will end the year at 2,900, up from a prior estimate of 2,700.
“While our fundamental assessment still implies downside from current levels, it is more probable that the trading range for the market should be 2,700-3,200 given powerful fiscal and monetary stimuli (with more likely from government next month),” Citi chief U.S. equity strategist Tobias Levkovich said.
The S&P 500 Index closed Monday at 3,179.72, its highest in a month. If Citi’s forecast holds, the benchmark can expect a roughly 9% drop for the remainder of the year.
BlackRock sees similar headwinds for the U.S. stock market due to the resurgence of the Covid-19 pandemic. On Tuesday, the asset manager downgraded the equities market to neutral from overweight.
A slower economic restart could further dampen the earnings prospects of U.S. companies.
The stock market’s recent resurgence has come with its fair share of volatility. The CBOE Volatility Index, commonly known as the VIX, has never been this high after such a strong equities rally. The so-called “fear gauge” continues to trade well above its historical mean.
Citigroup cited “incessant” Federal Reserve support for its revised outlook on stocks, a reference to the central bank’s unprecedented liquidity boost since the pandemic began.
A closer look at the Fed’s balance sheet reveals that these liquidity operations had been going on long before Covid-19 surfaced.
Over the past nine months, the Fed’s asset purchases have been strongly correlated with stocks, setting a dangerous precedent for the post-pandemic recovery. That’s because the Fed’s balance sheet has been largely responsible for the market’s massive rebound off its March low.
It’s not just the Fed that’s providing the liquidity boost. Central banks around the world have resorted to aggressive easing to prop up moribund economies. Once again, this trend predates the current crisis.
Since May, Chinese liquidity conditions have been loosening significantly, which largely explains investors’ newfound optimism. As the Financial Times reported, Chinese state-run media is preparing investors for the “wealth effect of the capital markets.”
Chinese stocks rallied on Monday by the most in a year despite dismal economic and corporate fundamentals. Like in North America, Chinese equity values are “rising far above levels implied by their historical relationship with earnings,” according to Thomas Gatley of Gavekal Research.
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Last modified: September 23, 2020 2:03 PM