U.S. Stock Market to Falter for Rest of 2020 Despite Unlimited Fed Ammo

July 7, 2020 2:18 PM UTC
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.
  • Citigroup’s year-end price target for the S&P 500 Index is roughly 9% lower than Monday’s close.
  • BlackRock also sees significant headwinds for the U.S. stock market.
  • China has been the latest source of market optimism, thanks to a massive liquidity boost from Beijing.

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.

Back Half of 2020 Will Be a Bumpy Ride for Stocks

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.

The S&P 500 Index rallied 1.6% on Monday but is still down for the year. | Chart: Yahoo Finance

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.

Mike Pyle, BlackRock’s chief investment strategist, adds:

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.

Dangerous Melt-Up

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.

The Fed kick-started its latest round of quantitative easing last September to keep overnight interest rates under control. | Chart: Federal Reserve

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.

The Fed is propping up a failing economy by printing trillions of dollars and giving it to banks. | Image: Twitter

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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Josiah Wilmoth edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

Last modified: July 7, 2020 2:19 PM UTC

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Financial Editor of CCN.com, Sam Bourgi has spent the past decade focused on economics, markets, and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE, Yahoo Finance, and Forbes. Sam is based in Ontario, Canada and can be contacted at sam.bourgi@ccn.com or at LinkedIn. Visit his Muck Rack profile here. Sam Bourgi is a Trusted Journalist.