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 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.
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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.
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...
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
d. ALL OF THE ABOVE
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!!!
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 into.....as 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".
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.
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.
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