The US stock market is trading near fair value for the first time in five years, argue the analysts at Credit Suisse.
With valuations offering little upside and a myriad of risks offering plenty of downside, Credit Suisse thinks now’s a good time to cut back on your portfolio’s exposure to stocks.
« We reduce our weighting in equities to a small overweight, our most bearish strategic stance on the asset class in seven years, » Credit Suisse’s Andrew Garthwaite said in a new note to clients.
In investing, being « overweight » an asset class means that you have a greater percentage of your portfolio allocated to that asset than what is seen in a benchmark. In other words, you’re taking a more aggressive position because you have more conviction in the upside the asset returns. So, to be « small overweight » means you’re overweight, but only a little. In short: Credit Suisse is telling you that being just a little bullish is the most bearish they’ve been since 2008.
« Consequently, we reduce our mid-2016 target for the S&P 500 to 2,150 (from 2,200), and introduce a 2016 year-end target of 2,150, » Garthwaite wrote.
The S&P 500 closed at 2,102, implying that Credit Suisse sees market going up no more than 2.2% in the next year.
Like most strategists, Garthwaite’s top worry for US stocks is the prospect of tighter monetary policy from the Fed and all of its consequences.
« Our concerns are: increasing macro headwinds (deflation exported by China, the first Fed rate rise in 9.5 years); US equity valuations are now at fair value; there are several warning signals (credit spreads widening, buybacks as a style underperforming, M&A activity reaching problematic levels, a decline in market breadth, earnings momentum at a 4-year low); the shift of power from capital to labour; and conventional business models are being disrupted, » he said.
So, why not be more bearish?
Among other things, Garthwaite observed that even though the S&P 500 is « fairly valued, » stock prices tend to peak when they are « significantly overvalued. »
« The US equity market has tended to peak on valuations around 1.2 standard deviations above their 10-year average (1.8sd during a bubble period), while the S&P is currently trading on a P/E multiple 1.0sd above its 10-year average, » Garthwaite said.
Currently, the S&P 500 is trading at a P/E multiple of around 16.6, which is higher than average, but less than the 1.2 standard deviations away from the peak that we’ve seen historically.
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