Wall St Week Ahead-After blazing U.S. stock rally, some warn of tougher market ahead
23/04/2021 11:00
By Lewis Krauskopf and Saqib Iqbal Ahmed
NEW YORK, April 23 (Reuters) - Some of Wall Street's biggest
names are predicting a pause in a rally that has taken the S&P
500 .SPX to fresh records this year, leaving investors trying
to determine whether to lock in some of the breathtaking gains
or stay the course.
Among the most recent has been Goldman Sachs, whose analysts
on Wednesday said an expected second-quarter peak in U.S. growth
could be tied to weaker stock returns. Morgan Stanley earlier
this week warned stocks would soon face headwinds. Deutsche Bank
this month called for a pullback of as much as 10% in the S&P
500 as growth decelerates, and BofA Global Research backed a
year-end target for the index about 8% below current levels.
A comparatively long period without a serious drop in stocks
has also made some investors uneasy. The S&P 500 has declined at
least 5% every 177 calendar days, according to Sam Stovall,
chief investment strategist at CFRA. The latest market advance
has lasted 211 days without such a drop.
"I wouldn't be surprised to see some kind of pullback for no
particular reason other than people start to think maybe this is
a little bit ahead of itself," said Robert Pavlik, senior
portfolio manager at Dakota Wealth.
The flurry of warnings present a conundrum for some
investors. While many would like to protect profits from the
market's 85% run since last year's pandemic low, pullbacks over
the past year have been difficult to time and followed by sharp
rebounds, bolstering the case for holding on and buying more
when stocks dip.
The S&P's two significant declines since March 2020 have
averaged a drop of around 8%, lasting 12 days on the way down
and taking 45 days to regain lost ground, according to Stovall.
In both cases, the market went on to new highs weeks later, a
pattern some have attributed to unprecedented monetary and
fiscal stimulus buoying investor confidence.
"Since the bear market of March of last year, buying dips
has been handsomely rewarded," said Randy Frederick, vice
president of trading and derivatives for Charles Schwab.
Since the lows of the Great Financial Crisis, the index has
climbed 511%, despite five drops of 10% or more and the 34% fall
last March, offering investors another argument for buying and
holding.
Nevertheless, some are bracing for potential turbulence,
reflecting concerns ranging from rising COVID-19 cases, and
worries that most of the economic benefits from massive fiscal
stimulus have already been priced in. On Thursday, sources said
the White House will propose nearly doubling capital gains taxes
for the wealthy. urn:newsml:reuters.com:*:nL1N2MF2B1
Stocks were on track for a decline this week but the S&P 500
is still up 10% in 2021. urn:newsml:reuters.com:*:nL1N2MF2B1
In options markets, the one-month moving average of open
puts to open calls, a measure of sentiment, is the most bearish
in about a year, indicating demand for protection against a
decline in stocks.
Options data also show a drop in demand for upside
positioning. The S&P's two-month call skew, an options-based
measure of investors' demand for upside, has fallen sharply
since early April.
"Investors are potentially seeing a lack of catalysts for
another leg higher," Susquehanna International Group's Chris
Murphy said in a recent note.
Next week, investors will be keeping a close eye on the
Federal Reserve's monetary policy meeting, as well as a speech
by U.S. President Joe Biden to Congress and earnings from
companies such as Apple Inc AAPL.O and Google-parent Alphabet
Inc GOOGL.O .
One worry is the comparatively rich valuation of stocks,
with the S&P 500 trading at 22.3 times forward earnings
estimates, compared to a historic average of 15.4 times,
according to Refinitiv Datastream.
"The market is expensive, so we have been looking for stocks
that still seem to have upside," said Peter Tuz, president of
Chase Investment Counsel in Charlottesville, Virginia.
His firm sold some holdings in tech-related stocks such as
Apple and Amazon Inc AMZN.O in recent weeks, and bought shares
of Prudential Financial PRU.N , energy company Pioneer Natural
Resources PXD.N and homebuilder Green Brick Partners GRBK.O .
Still, the market has outperformed analysts' projections
before. A Reuters poll of strategists from May 2020 forecast the
S&P 500 ending the year with a marginal decline from that point.
Instead, the index went on to rally about 25%. A February 2019
poll projected a 3.8% S&P 500 rise for the rest of that year,
when it ended up rising some 15% more.
Even with the market's run, "you actually can find companies
that are not overly expensive right now," said Scott
Schermerhorn, chief investment officer at Granite Investment
Advisors.
Sitting in cash, "you are going to make nothing," he said.
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Ripe for a reversal? https://tmsnrt.rs/3tGz6Qw
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(Reporting by Lewis Krauskopf; additional reporting by Saqib
Iqbal Ahmed and David Randall; Editing by Ira Iosebashvili and
Richard Chang)
((lewis.krauskopf@thomsonreuters.com; 646-223-6082; Reuters
Messaging: lewis.krauskopf.thomsonreuters.com@reuters.net,
Twitter: @LKrauskopf))
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