Monday, January 17

Strategists lose the market compass

The irruption of the omicron variant and the aggressive turn of the Fed it completely blew away professional forecasters of the stock market.

Stripped of their compass, strategists are less clear than ever where stocks might go next year.

The vast majority bet on equities, in many cases due to the lack of options in fixed income, but the wide dispersion of their projections reflects the confusion that rules the market.

Thus, between the lowest estimate for the S&P500 in 2022 of 4,400 points, and the highest, of 5,300 points, there is a gap of 20 percent, the widest in a decade, according to data from Bloomberg.

In an increasingly complex world, economists have to contend with a central bank that has now become much more aggressive and intolerant of inflation. And with a virus that does not stop giving scares.

After almost two decades under control, many of these experts have not yet experienced what is a full-blown price hike in their meats. And this is reflected in their valuations.

Conditions will not be so favorable

Not even the optimists exclude episodes of high volatility in this more uncertain environment in which the market will move.

For example, in the broker Ned Davis Research they expect the S&P 500 to finish next year at 5,000 points, which is a 7 percent bullish margin. But before that, it will eventually drop by at least 10 percent.

“It is almost certain that conditions will not be so favorable for the market in 2022,” he said. Ed Clissold, chief strategist of Ned Davis Research.

“We expect a slower pace of earnings, more frequent pullbacks, a high probability of a double-digit correction and a realistic possibility that there is a shallow bear market,” stressed this expert.

Among the most pessimistic investment banks is Morgan Stanley, whose estimate of 4,400 points for the S & P500 implies a potential drop of 6 percent. The strategist of the firm, Mike Wilson, believes that the recent market weakness is explained by the Fed more than by the omicron variant.

“The new variant started the uproar in the markets, but we consider it secondary to the real culprit: the Fed’s more aggressive response to economic data,” Wilson said.

The purge that comes in the first half of the year

The Fed’s accelerated tapering could advance a purge that would not be strange either, given the high valuations of a market that is expensive. Thus, the PER ratio of S&P 500 it is at 20.4 times, compared to 16 times on average in the last decade.

This squares with the downtrend you expect Clissold in the first half of 2022, a period where there will be more risks of volatility and the impact of the virus and the effects on supply chains will still linger.

In fact, the 5,000 points you expect Swiss credit for him S&P 500 next year they place the Swiss bank among the most optimistic forecasters. And even so, the experts of the entity expect that the bags lose momentum next year.

Returns will be in the single digits, in part because bonds will barely offer alternative options, more so with the Fed above the yield curve. This theory of a more moderate impulse is also joined by JP Morgan, whose experts speak of “sporadic setbacks” in the market due to the coronavirus.

The disparity of opinions among forecasters is the result of the multiple variables that must be considered in the equation, “whether it is what is happening with the Fed, inflation or the continuous ups and downs of the pandemic,” he said. Joshua Leonardi, director of TD Prime Services.

The pace of the Fed will set the pace of the market

Another of the great uncertainties is the Fed’s adjustment plan, a roadmap that the US central bank could further specify after the meeting on December 16.

It is assumed that the US central bank will accelerate tapering and raise interest rates next year, but the pace it sets is another thing.

Thus, the data collected by Ned Davis show that during the first year of tightening, equities gained 11 percent in slow cycles, while they lost 2.7 percent in fast cycles.

All these aspects have yet to be specified, which is one more difficulty that favors the dispersion of the different evaluations.