Stocks will fall about 5 percent from current levels and may even slide into bear market territory in the next few months as emerging markets like China rattle investors, said Bob Janjuah, senior adviser at Nomura Holdings Inc.
He forecast that the S&P 500 stock index will end the year at 1,820 from its current level of about 1,920 amid signs of economic weakness.
“I fear that we could even see prints in the low 1700s which would entail a 20 percent move (an official bear market) in the S&P 500 from its 2015 high of 2134,” he said in a
Sept. 30 report obtained by Newsmax Finance. “Globally I expect things to be even weaker.”
The S&P 500 fell 6.7 percent from July to September, the worst quarter in four years for the benchmark. China’s currency devaluation was a key trigger for the sell-off as investors fretted that the world’s second-biggest economy was in trouble.
“China’s devaluations are not over yet,” London-based Janjuah said. “There is more weakness ahead — both fundamentally and within markets — over the fourth quarter and perhaps into first-quarter 2016.”
A rise in the S&P 500 to a weekly close above 2,020 will hit the stop-loss trigger on his short position, he said. A stop-loss order is intended to minimize trading losses.
Janjuah has a reputation for being a “permabear” who relentlessly finds reasons to be pessimistic about stocks or the economy. Meanwhile, unprecedented monetary stimulus by central banks since the financial crisis in 2008 has invalidated bearish calls by many analysts.
Looking for ‘Yellen Put’?
Janjuah estimated that the S&P 500 would have to reach the 1,500s in order for the Federal Reserve to respond with monetary stimulus: the “Fed Put.”
Wall Street coined the term “Greenspan Put” to describe how former Federal Reserve Chairman Alan Greenspan helped to prop up stocks by lowering interest rates and flooding the financial system with easier credit. A put is an options contract that allows a trader to sell a security at a preset price.
The “Bernanke Put,” named for Greenspan’s successor Ben S. Bernanke, described the Fed’s several rounds of quantitative easing. Those bond-buying programs were intended to help the economy recover from the worst recession in 80 years.
Current Fed Chair Janet Yellen said the central bank is looking to raise interest rates this year — the first hike since 2006. Back then, the U.S. economy was growing by more than 5 percent a year, compared with 3.7 percent currently.
Any rate hike will be short-lived and followed by more monetary stimulus, Janjuah said.
“Clearly QE4 has to be in the Fed’s toolkit,” according to his report. “However, considering the failure of global QE to generate sustainable global growth and inflation, and considering the Fed’s starting point, 2016 could be the year when we see negative Fed Funds as a way of getting money velocity moving up rather than down.”
Goldman Sachs last week cut its year-end target for the S&P 500 to 2,000 from 2,100, pointing to slower economic growth in the U.S. and China and lower oil prices.
"A lower path of profits is an obvious reason to lower a price target but the risks for the index level and price-to-earnings multiple have also increased," said David Kostin, chief U.S. equity strategist at the New York-based bank,
in a Sept. 25 report. "'Flat is the new up' will be the 2016 investor refrain."
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