Stock market rebound could see the S&P 500 rise 5% before a major decline, says market veteran

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Stock market rebound could see the S&P 500 rise 5% before a major decline, says market veteran

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US equities could prepare for a relief rally that could push the S&P 500 back towards 4,400, but don’t expect it to last, warned a veteran market strategist who called the index’s first-quarter decline.

“We see a relief increase from the S&P 500 to 4,400 [April 30, 2022]but then we see the risk of a more prolonged slowdown that should cause the S&P 500 to weaken again from May to October 2022, ”Stifel’s chief equity strategist Barry Bannister wrote in a statement on Tuesday.

A rebound to 4,400 would require the S&P 500 SPX,
+ 1.86%
up 5.4% from Monday close at 4,173.11. The large-cap benchmark, which previously entered correction territory with a drop of more than 10% from its early January high, rose 1.3% to near 4,226 on Tuesday. The Dow Jones Industrial Average DJIA,
+ 1.73%
jumped about 360 points, or 1.1%.

Bannister in February reiterated a call for a withdrawal of the S&P 500 that would test the 4,200 level in the first quarter after an earlier request for a summer 2021 correction missed the mark. He asked for a test of 4,050 on February 2nd. 27, three days after the invasion of Ukraine.

Banister based the range on a look at the equity risk premium, which refers to the additional return that investors require to hold shares versus risk-free Treasuries. Stifel calculates the premium as the “normalized” earnings yield of the S&P 500 (earnings per share divided by price) above or below the real risk-free 10-year Treasury yield (see chart below).

Stifel

That analysis indicates a certainly wide range for the S&P 500 between 4,200 and 4,600, he wrote.

Stifel sees the S&P 500 at the upper end of the spread through the end of April and at the lower end between May and October. Positive seasonal factors are part of the reason for the short-term relief rally expectation, Bannister said, arguing that “the only way a rally does not occur by the end of April 2022 is if current events are the worst seasonal market environment in 71 years (which we do not consider probable). “

Bannister said he now expects the March 8 low of 4,158 to remain if there is a peace agreement between Russia and Ukraine and signs of sanctions on the demise of Moscow.

Without an easing of sanctions, a “supply shock” recession is possible, he said.

“If sanctions against Russia don’t end after a peace agreement, then two-way economic warfare means sanctions [plus] Russian commodity embargoes against Western GDP, “Bannister wrote.” The Russian Black Sea fleet and other capabilities control a large share of oil and gas, nickel (batteries, steel), palladium and platinum (OEM for automotive emissions , electronics), wheat, corn, fertilizers, aluminum, semiconductor neon, etc. “

See: The invasion of Ukraine feeds stagflation fears because Russia is a “commodity superstore”

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