Wells Fargo & Co. (NYSE: WFC) financial strategist Gina Martin Adams has been quite conservative when it comes to her stock forecasts for most of the year, including the time when the Standard & Poor 500 rallied by 21 percent. With the Federal Reserve confirming that it will refrain from tapering its bond-buying economic stimulus for the time being, Ms. Adams said on Futures Now that the S&P 500 index will close 2013 at 1,440, continuing her trend of being extremely bearish and conservative in her forecasts.
“Our target is based on fundamentals,” said Ms. Adams. “We’re basing our target on typical valuation measures, given the level of interest rates and also on earnings forecasts. And that’s why our target is relatively low.” Her hypotheses on the stock market going forward suggest that the market will lose 16 percent in the December ending quarter of 2013, thereby negating any and all improvements made following 2013’s first day of trading.
Talking about the recent rally in stock prices driven by the improved political situation in Syria and the Fed’s decision not to taper its bond purchases yet, Ms. Adams looked at this rally with a lot of skepticism. “It’s all about emotion at this point,” said Ms. Adams. “The entirety of the S&P 500’s increase this year has come via the multiple. It’s been simply through the amount that investors are willing to bid up the value of the future earnings stream.” One metric that backs this postulate up is the S&P 500’s price-earnings multiple, which had gone up from 17 on January 1 to close to 20 as of this writing.
Ms. Adams is of the belief that investors have yet to acclimate themselves with the recent increase in Treasury yields, from 1.6 percent on the 10-year Treasury to 2.7 percent at the present. “Stocks tend to follow rates over time,” said the strategist, astutely describing the ramifications of Treasury gyrations. “Typically, when you get a 100 basis point move in Treasury rates, you get a contraction on the P/E multiple on stocks of about a full turn. That, by itself, implies you get something of a 10-percent-plus correction in stocks.” Regarding the Fed’s decision not to taper, Ms. Adams said that “the damage has been done”, as far as “taper talk” leading to higher mortgage rates and volatile stock prices is concerned. The only thing that would counter this, she said, would be a puissant rally in bond prices and the Fed being “able to manipulate yields significantly lower.”
Be that as it may, Ms. Adams closed her Futures Now interview by warning investors that it may be time to “face the music” next month due to the precipitous fall in stock prices she expects to happen next quarter.