Stocks about to plunge, Wells Fargo strategist warns

Gina Martin Adams' target implies that the market will drop 16% in little more than 3 months.

By MSN Money Partner Sep 20, 2013 2:01PM

CNBCStock market crash © Kyu Oh/Photodisc/Getty ImagesBy Alex Rosenburg


Gina Martin Adams is sticking to her guns.


The Wells Fargo (WFC) strategist has been bearish on stocks all year, even as she watched the S&P 500 ($INX) add 21%. And on Thursday's "Futures Now," Adams reiterated her call that the index would close out the year at 1,440.


"Our target is based on fundamentals," Adams insisted. "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."


In fact, "low" is somewhat of an understatement. Adams' target implies that the market will drop 16% in little more than three months, erasing everything that stocks gained after the year's first day of trading. This makes her one of the lone bears on the Street.


So what could produce such a dismal fourth quarter for stocks?


First of all, Adams is highly skeptical about the rally that the market has enjoyed thus far.


"It's all about emotion at this point. The entirety of the S&P 500's increase this year has come via the multiple," Adams said. "It's been simply through the amount that investors are willing to bid up the value of the future earnings stream."


Indeed, the S&P 500's price-earnings multiple has risen from 17 on Jan. 1 to nearly 20. That means the market has largely been rising due to investors' willingness to pay more for those earnings.


Adams goes on to argue that the recent rise in Treasury yields could put an end to this inclination.


"The multiple is one of the most valuable components" of the rally, and "typical drivers of the multiple are interest rates." So despite the fact that yields have cooled off recently, "simply the fact that we moved from 1.6 [percent] on the 10-year Treasury rate to now the 2.7 [percent] range is a potential tremendous shock over the next six months," Adams contended.


Adams believes that stocks haven't yet digested the rate rally. "Stocks tend to follow rates over time," she said. "Typically, when you get a 100 basis point [or 1%] 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%-plus correction in stocks."


And while the Fed's decision that it wouldn't slow its rate of asset purchases has driven the market to yet another all-time high this week, Adams doesn't believe the surprising announcement will ultimately make a difference.


"Unless bonds can actually rally substantially with the so-called Fed bid, and the Fed is able to manipulate yields significantly lower, the damage has been done, and I think the cat is quite frankly out of the bag."


Couple the rise in rates with slow earnings growth, and Adams believes the market is in for a very tricky fall.


"We're going to have to face the music come October," she said.


More from CNBC

Sep 20, 2013 2:26PM
I totally agree with Ms. Adams. The fundamentals aren't there. The market is overbought, shallow, hollow and based on free cheap money from the Fed. None of the QE injections worked to bolster the economy in any meaningful way except inflate equities. They need to read Adam Smith's 'wealth of Nations'. Economies are based on productive capacity then consumption. There are plenty of opportunities to do so especially within the energy sector with shale oil and gas. The administration refuses. Get used to Ian McLeod's term 'Stagflation'. It's going to be the norm. 

"If something can not continue on forever, it will stop"
        - Herbert Stein
Sep 20, 2013 3:08PM
The only people that have recovered their money in this "market recovery" are the big dogs who had enough money and confidence to ride out the storms of 2008 and 2009.  They bought up a lot of bargains when nobody was buying and watched the prices go up.  I held on to a few things and the prices never went back up, never.  I finally gave up and sold at a loss.  meanwhile my tax dollars went to big banks so they could buy up their competition.  wasn't TARP money meant to stimulate lending?  Rate were low but the bank were not lending.  they used that money to grow even bigger and pay out their own bonuses.  Bush and Obama wrote not one word into those TARP bills to prevent them from doing that, and we, the taxpayer losers, footed the bill.  Too big to fail?  Why?  What do they ever learn from this except that they can keep cheating us?
Sep 20, 2013 2:51PM

Sep 20, 2013 3:24PM
I think all investors are looking for the best place to put our money at any given time.  Right now, with the low interest rates, there isn't much incentive in bonds, treasuries, or bank CDs.  Also, gold has taken a major dump.  With those options basically eliminated, the only thing left are stocks (or maybe real estate if you want to be a landlord).

I remember reading an article a while back on how much money was being taken out of bond funds - probably all of that money was reinvested in stocks.  So, it's no great surprise that the PE ratios are high.

But, at the end of the day, no one can really predict the market - so the strategy always seems to be the same:  pick your bets and ride it out.  Sometimes, doing nothing is the most profitable option.
Sep 20, 2013 2:58PM
It needs to plunge 60% and it would but for the feds market propping.

In other words the market is three to four times where it should be based upon normal price to earning ratios.


Sometime between now and Sept 13 2015 the stock market and bond market are going to collapse below the 2008 crash levels.


The US economy is dead and nothing the Fed has doen has brought it back. China and the rest of the world are no longer going to let Bernanke print money like it was no big deal.


The day of recking is upon us. It will take the Fed about 2 years in order to wind things down to zero.

Whatever crash happens, I'll be there buying indusrty leaders. Bring it on!
Sep 20, 2013 3:32PM
Weds. saw a record amount of money going into mutual funds. The dumb money has arrived. That is always the top.
Sep 20, 2013 2:39PM
When it does crash sooner than later, people would not have learned from the last crash.  Thank God I have never wasted my money in the market and will stand aside when the rest of you freak out knowing you did it to yourselves for believing the lies.
Sep 20, 2013 3:52PM
I went to 100 percent cash yesterday. I should have bought SDS at that time. Americans need good jobs and with an administration that attacks coal, refuses Keystone, and levies HCR and other nonsense on business the employment situation will not improve anytime soon. When will the man-child Obama stop blaming Bush and take ownership of his disaster??
Sep 20, 2013 3:45PM
Sure would be great if the dipschlitz in DC would stop trying to manipulate everything, which they do in part because they are incapable of not spending 50% to %100 more than they take in. Fools, nearly every last one of them.
Sep 20, 2013 3:01PM
oh can I get a job like that? 'strategist' hehe NO!! really?? market plunge! huh?? what?!!! what gave it away???? I mean what could possibly go wrong with marxist financial theory?? aka obamanomics?? it's going sooooooooo well with all the skyrocketing unemployment!!

plunge you say?? oh you're just hatin' on a black guy who's IQ is about even with a house plant! well a notch or two below...but still!!

hmmmm gotta wonder what they'll say when the 56,888,433 stimulus, oops I meant 'quantitative eaaaaaaaasinnnng' stops? um...let's see now...

will it:
a. destroy the job market further
b. plunge the country into financial ruin (that's happening anyway I'm saying MORE plunging)
c. can you say stock market CRASH?
d. regret the day you ever voted for a 'black guy' to assuage your guilty conscience

hmmm wonder which one it is??? hmmm, now don't tell me now if you know the answer!!!  I wanna get this myself!

I'll get it! I'll get it! just give me some time...I need to think 'bout it!!!

Sep 20, 2013 2:54PM

Mr Brucey should watch out for flying golf clubs.

Sep 20, 2013 3:54PM
It's not complicated.  When interest rates get over 3 to 3.5 percent the market will plunge.  That is when the risk averse investors will switch from dividend stocks to safer investments with equal returns and the decrease in demand for  these stocks will force their prices lower.  Those are the fundamentals at work.  I don't see the fed rate rising that far in the next three months, however.  Next year ... could happen.
Sep 20, 2013 2:52PM

Someone and I have bumped heads, past.  However, it was from a questioning vantage point on my part....not a knowledge rift as believe he knows his stuff. 


I agree with Ms. Adams, also.  I echo what Someone said.  He pinpointed the sector and defined why to a greater rather than lesser degree.  I remain with a concern that inflation will run rampant if this obvious source is truly tapped it should be.  The best scenario is the stagflation that Someone mentioned.  The statement that beckons consideration and is excellent is..."economies are based on productive capacity then consumption".  



Sep 20, 2013 2:58PM
Hmmmm... nothing like doubling down when the house is winning.  Let's trot this article out on Dec. 31 and see just how good a market predictor this chick is.
Sep 20, 2013 4:10PM
All these guys are like the weatherman, wrong 90% of the time and still get paid
Sep 20, 2013 4:24PM

Wait a minute. 16% is a "plunge"? That's only about 1560 points of the DOW, leaving it still at 14,000, or at least over 13,500. That's barely passing wind in a thunderstorm. 

Now, if the "plunge" was also based on the low Labor Force Participation Rate, low wage level of  jobs available, change of two-income households to one-income households which, along with over-indebitedness of those households, results in less "consumer spending", I could undersdtand calling it a plunge. It would be based on reality.

Sep 22, 2013 10:49AM
MSN, why do you promote this negativity -- We have been hearing this for 5 years
Sep 23, 2013 1:38PM
Traders, take a bow ,,, you manipulate the markets to perfection today (9.23) to sucker in honest investors.

Mr.Bernanke, did you see this quote?: The more people who speak from the Fed in one day, the less clarity there is,” Richard Sichel, who oversees about $1.9 billion as chief investment officer at Philadelphia Trust Co., said by phone.

Traders are manipulating every comment your colleagues make.

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