After strong returns in 2013, are equities poised to enter pullback territory?
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2014 hasn’t gotten off to a great start, with all of the major indices in the red for the year. The market barometers are also alarmingly close to pullback territory, which is defined as a decline between 5% to 10% from recent highs.
Wall Street ended 2013 with many financial professionals calling for yet another leg up in equities for 2014, just not as large of one seen in 2013. Bank of America Merrill Lynch called for a 2000 price target on the broad S&P 500 in 2014. S&P Capital IQ strategists called for the U.S. market to move higher, with the benchmark index at 1895 in 12 months, but not without a pullback first. Others called for a more long-lived pullback with the markets ending the year lower than they started.
“We believe a correction is not only possible, but is also probable in the year ahead,” said Sam Stovall, chief equity strategist at S&P Capital IQ, in a note. “However we don’t think a new bear market will ensue.”
So is this just a correction, and therefore a buying opportunity, before that next run?
“On the overall basis, I like this correction. I think it is a buying opportunity eventually, but I want to see stabilization before I get into it,” Yu-Dee Chang, Ace Investment Strategists chief trader, said.
But Peter Boockvar, managing director and chief market analyst of The Lindsey Group, doesn’t think we’ve seen the worst of it yet. In a letter released earlier this month, Boockvar called for a 15% to 20% drop in the S&P 500 this year, finishing between 1550 and 1600. The S&P 500 is currently trading at 1790 and was around 1840 when he first made his prediction.
The reason for his bearish sentiment? A winding down of the Federal Reserve's quantitative easing (QE) bond-buying program.
“QE doesn’t create a safer world.” he said. “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.”
Boockvar argued that if the Fed is more accommodative than currently anticipated, then he would turn more bullish.
Todd Schoenberger, managing partner at LandColt Capital, said he would be even more bearish if the Fed decided to be more accommodative. “Once they made the move to announce tapering, you can't go back,” Schoenberger said. “If the Fed went back and said ‘well, it looks like we were premature with tapering and the economy stinks so we need to up the juice to $100 billion per month’ the markets would collapse.”
Schoenberger, who is nearly as bearish and Boockvar, is calling for a 15% decline in the S&P 500 this year.
“You'd be a fool to jump head first into this market. It's best to pick your spots.”
He likes stocks in the area of travel and leisure, specifically Hyatt Hotels (NYSE:H), Delta Air Lines (NYSE:DAL), and Marriott International (NYSE:MAR). “Hotels and airlines are doing well, and will continue to do well in the first half of the year,” he said.
Schoenberger personally holds long positions in Hilton and Marriott.