“B-, b-, b-, baby, you just ain’t seen na, na nothing yet.”
In the wake of a big bashing for stock markets this week, BofA’s chief investment strategist Michael Hartnett seems to be channeling a bit ofBachman Turner Overdrive. In a fresh note to investors, he says the big stock market correction is not now, but later.
“High cash, low leverage…bull markets don’t end this way. We think bigger 10-15% correction more likely in autumn as Fed QE ends and rate-hike expectations grow,” says Hartnett, in a note dated April 10.
He has the rest of the year mapped out as well:
January to April: The “hard reversal” period has seen emerging markets, bonds and gold, the losers of last year, become the winners of this year. They’re replacing 2013′s stars — Japan, Nasdaq COMP -0.24% and the U.S. dollar. But that reversal period ends in April. He cites two reasons:
1. So-called “extreme positions” are being eliminated fast. Since BofA’s last March Fund Managers’ Survey in mid-March, emerging-market equities have outperformed the Nikkei JP:NIK -2.38% by nearly 1,000 basis points (in dollar terms).
2. Policy makers will turn dovish again. He says watch Nasdaq 4000, $2.20 on the Brazilian real USDBRL -0.15%, 66 on the PHLX/KBW Bank Index BKX -0.93% and 2.5% on the U.S. 10-year Treasury yield 10_YEAR -1.39%. “The biggest risk is that markets lose trust in vacillating Fed, the only policy maker the market truly trusts,” said Hartnett.
May to August: Rotation back to higher growth/higher yield/higher U.S. dollar plays. “Bigger picture remains Fed will continue to taper (even if rhetoric softens), and China unlikely to tighten. But we expect conviction in the U.S. economy to grow in the summer,” says Hartnett. BofA economists forecast U.S. growth of 3 to 3.5% for the next three quarters, the most sustained period of 3%-plus growth since 2005. Against this backdrop, credit markets will remain strong and improvement in growth expectations should benefit large-cap value cyclical stocks such as Japan (note: the Nikkei 225JP:NIK hit a 2014 low on Friday) and the DJIA DJIA -0.49% as Fed rhetoric has purged some overzealous positioning.
September, correction time: Hartnett says bull markets don’t usually end with such high cash and low leverage, and also rarely end with tobacco being the only subsector at an all-time high. Bears looking for that big 10%-15% correction should wait until September and then buy volatility and up cash levels as Fed QE ends and rate-hike expectations grow for the Fed’s Sept.17/Oct. 29th policy meetings.
BofA’s Hartnett has a year-end S&P 500 target of 2,000, which hasn’t changed. The firm is overweight tech, energy and industrials, underweight discretionary, utilities and telecom and overweight low-beta/high quality/high growth and defensives over cyclicals. BofA’s says its own Bull & Bear index is far from a greed signal of more than 8.0, suggesting the current market rally has more room to run.
The current climate has others calling for a bigger pullback. Gloom, Boom & Doom’s Marc Faber told CNBC on Thursday that he expects and crash in the next 12 months that will be worse than what was seen when the Dow industrials dropped 22.6% on Oct. 19, 1987. He thinks the market is “slowly waking up to the fact that the Federal Reserve is a clueless organization.”
“This year, for sure — maybe from a higher diving board — the S&P will drop 20%,” predicts the known contrarian. “I think, rather, 30%. Who knows. But all I’m saying is that it’s not a very good time, right now, to buy stocks.”
Source: Marketwatch
