A top market watcher believes that a chilling trend in the market could wreak havoc on your portfolio.
“We are seven years into a full-fledged, all out, central bankers doing everything they can to stimulate demand,” Bank of America-Merrill Lynch’s head of U.S. equity and quantitative strategy Savita Subramanian recently warned on a television interview.
“We looked at all of these indicators that have been pretty good at forecasting recessions and we extrapolated that if they follow the current trends they’re on, we’re going to hit a recession sometime in the second half of next year,” she said.
According to Subramanian, this recession risk isn’t discounted into the market at these levels and this is the most unsettling thing.
Hit on August 15, the S&P is 1.8-percent away from its intraday all-time high of 2,193.81. About seven percent lower than where it’s trading is where Subramanian’s year-end 2016 S&P 500 price target is at around 2000. And it’s about to get a lot worse next year, if she’s right.
“What scares me is the market been so fragile. So, remember what happened in January? We got a whiff of bad news and all of the sudden the market is at 1800,” she said—a move that augured poorly for the near-term.
“I think that speaks to the reaction function of the market. There are a lot of itchy trigger fingers. There’s lot of violent trades that can really roil a fairly complacent environment,” she added.
Subramanian says the health care and technology sectors look the best right now even though she acknowledged there’s a lot more risk than reward at this point.
“They are both pretty cheap on a relative basis,” she said.
“Health care has taken it on the chin because of Hillary [Clinton] risk and fears that the M&A cycle is over,” she said, referencing the 2016 elections. Primarily due to her stances on drug companies and health care, some sector analysts perceive Democratic nominee Hillary Clinton as a risk to the sector.
“It’s now trading at almost the lowest multiples we’ve ever seen. But, meanwhile it actually has good growth,” Subramanian said.
The Bank of America Merrill Lynch also warned that if the U.S. economy maintains its current course, a recession looms in 2017.
According to Subramanian, “evidence of an imminent recession” is being signaled by some of the bank’s favorite early-warning signs.
“While the range of signals is wide, in aggregate they do suggest that, if data were to continue to weaken in line with the recent pace, history would point to a recession in the second half of 2017,” she added.
The thresholds that have, in the past, heralded an economic downturn will be breached by around October 2017 include commercial and industrial loan growth, building permits, growth in temporary help employment, ISM manufacturing index, and the trends in the yield curve.
However Bank of America’s economists expect activity to firm going forward and deem the probability of recession over the next 12 months to be low.
Still, Subramanian cautioned that the stocks are not pricing in at all the possibility of a recession beginning in the next year.
(Adapted from Bloomberg)
Categories: Economy & Finance