Despite numerous headwinds, the stock market has been incredibly resilient in 2013, and the S&P 500 is up over 23% year-to-date.
In his latest note to clients, Credit Suisse (CS) global equity strategist Andrew Garthwaite identifies four catalysts for a correction in the stock market:
Overall, we continue to believe that equities would have a meaningful correction (i.e. 10% or more) only after one of the following events occurs:
(1) There is a clear monetary shock with interest rates rising: we think this is likely to be a mid-2015 event in the US;
(2) Equities become clearly expensive against bonds (i.e. the US 10-year bond yield rises above 3.5%);
(3) Risk appetite indicators hit euphoria;
(4) A global macro shock (the most likely candidates being a sharper-than-expected slowdown in China or political shocks in peripheral Europe).
Despite the lack of any real threats to stocks on the radar from Garthwaite’s point of view, the strategist believes the S&P 500’s advance will stagnate in the near term:
We stick to our long-standing overweight of equities and our end-2014 target of 1,900 on the S&P 500. Markets have surpassed our end-2013 target (of 1,730 on the S&P 500) and we see a heightened risk of near-term consolidation as:
– Some tactical indicators are signalling caution: The bull/bear ratio, director selling, and the gap between sector risk appetite and overall risk appetite have all reached extreme levels associated with marginal market falls on our back-tests. In addition, corporate net buying has slowed to zero (from 3% of market cap), again a precursor to consolidation.
– Earlier Fed tapering than the market expects: we agree with our US economics team that tapering is more likely to start in January than in March, largely because the market is too pessimistic on 2014 US growth prospects.
– Earnings revisions have underperformed macro momentum.
– Growth momentum: macro surprises have yet to recover post their September fall, but we think they will.
“However, we stress that the risk is consolidation in the near term, not a correction and we believe that markets in 6 and 12 months’ time will be significantly higher,” concludes Garthwaite. “Hence, we stick to our overweight of equities.”