“U.S. stocks can’t go straight up forever. And if the end of QE1 and QE2 taught investors anything, the market could suffer a significant correction this year as the Federal Reserve starts dialing back its stimulus.
That view comes courtesy of Peter Boockvar, managing director and chief market analyst at the Lindsey Group, who on Thursday predicted the S&P 500 could drop 15% to 20% in 2014 and finish the year between 1550 and 1600.
The S&P 500 opened the year down 0.6% at 1837. The index surged 30% last year, its best performance since 1997.
In his morning missive, Mr. Boockvar laid out a bearish thesis for stocks while noting the eventual end of the Fed’s quantitative easing, or QE, will lead to a rocky road ahead for investors.
“QE doesn’t create a safer world, it is just a temporary high and the danger always comes on the flip side as previously seen,” he says. “Let’s be honest, we are in an investing world that none of us has ever seen before with central banks around the world being aggressive in concert on a scale never seen.
“These are not normal times where the ordinary analysis of company fundamentals and the economic and earnings outlook are the main drivers.”
In 2013, most Wall Street strategists including Mr. Boockvar was surprised by the strength of the stock-market rally. At the start of last year, a group of strategists predicted the S&P 500 would gain 8.2% in 2013, far lower than what the rally ultimately achieved.
At that time, Mr. Boockvar also incorrectly called for a mid-single-digit return. Now, he acknowledges how far out on a limb his call is in relation to what other strategists are predicting.
“It’s blasphemy, I know, to call for a down year,” he says. “I already hear the heckling and the perma bear calls as I did in ’06 and ’07.”
But Mr. Boockvar can’t get past the fact that stocks suffered significant pullbacks the past two times the Fed pulled back the punch bowl. He finds it hard to figure why this time would be any different.
He says stocks are in a “Fed-induced bubble” which has manifested in the Treasury market and has filtered through to other markets.
“Higher prices for stocks, junk debt, paintings, wine, cars, comic books and NYC high end apartments are just by-products of the mispricing of the cost of money,” he says. “We are, however, finishing 2013 with the bond bubble showing signs of leaking air as evidenced by the sharp rise in yields across the curve notwithstanding the Fed’s hope.”
Higher interest rates in 2014 could act as “a major headwind for stocks,” he says. “When bubbles burst, there is no place to hide other than in cash which conversely and positively provides dry powder to take advantage of better values.”
Other market watchers share similar assessment….”