Editor’s note: This article was first published in October 2013 and reflects forecasts made then. The S&P 500 did not fall to 1,450 points in the first quarter of 2014, having ended 2013 above 1,800, and the Fed tapered its bond purchases during 2014, ending QE3 in October 2014.
After gains of 170% since March 2009, Wall Street stocks may need a well-deserved rest.
Following on from the report presented by Société Générale (SocGen), and putting together a few other pieces of the puzzle, the truth is that the sharp correction expected for the S&P 500 could be just around the corner, while the word “bubble” is once again being heard loudly in far too many contexts.
According to the SocGen report, titled “S&P 500: -15% in sight”, easy money from the Federal Reserve and the permanent dysfunction in Washington will cause the stock market to languish.
At the moment, SocGen is recommending investing in Japanese and European equities, and advising against US equities.
The scenario it sets out could see the S&P 500 heading for 1,450 points in the first quarter of 2014. That is not crazy, considering that the S&P 500 fell 16% after QE1 and 17% after QE2.
The main problem in the United States is that it is building a bubble of severe proportions (again), with the market looking only at what the Fed does.
If we look at a chart produced by Jerry Khachoyan, we can see how bull cycles in the market begin with liquidity injections and how the market falls when the Fed stops, although technically without losing the market’s upward trend.
This time, we are looking at Fed action that is unprecedented in both size and duration, because the liquidity injections have no set end date. But they will end, and if they don’t, it could mean total chaos for the system.
Joseph Baratta of Blackstone told CNBC that we are in the middle of an epic credit bubble, of a size he has never seen in his career.
* Blackstone is one of the largest investment firms in the world. Baratta thinks the financial system is too leveraged.
Other investors such as Warren Buffett and Carl Icahn don’t want to use the word “bubble”, although they acknowledge that prices are not at buying levels.
Only time will tell.
