Tags: Krake | Fed | S&P 500 | taper

Money Manager Krake: S&P 500 to Rise Another 15 Percent

By Michael Kling   |   Monday, 28 Oct 2013 10:25 AM

Despite already soaring 23 percent this year, the Standard & Poor's 500 will rise another 15 percent, aided by the Federal Reserve maintaining its economic stimulus through June.

That's what one strategist told CNBC.

"Given the outlook for historically low funding rates, the S&P 500 looks some 15 percent undervalued, 20 percent from October lows," said Paul Krake, founder of View from the Peak:Macro Strategies.

Editor’s Note:
5 Reasons Stocks Will Collapse . . .

"Is it a stretch to say that the S&P will trade at one standard deviation over its 20 year mean?" he asked, saying that would equal 18.7 times 2014 earnings, which would put the S&P over of 2,050.

"I don't think that's a stretch."

If the Fed doesn't start tapering until June, as Krake predicts, it will buy about another $700 billion of assets, driving stocks sharply higher, he told CNBC.

Plus, stocks have proven to be resilient recently, rising in the face of a federal government shutdown, debt limit fight and potential government default, he explained.

"Liquidity is the fundamental driver of all this, if you take a step back and look at what happened in Washington DC, equity markets didn't care about a default . . . they rallied in spite of it."

As for slowing growth overseas, don't worry.

"The reality is that this is the first year since 1995 that we've had simultaneous growth in China, Europe, the U.S. and Japan," Krake noted. "Yes, it's slow but valuations aren't stretched."

The bad news is that the S&P 500 will drop 10 to 15 percent when the Fed starts tapering, he added.

When the Fed starts shrinking its $85 billion a month bond-buying stimulus, which has kept long-term rates low and boosted stock prices, it will have a huge impact on the stock market's direction. Most economists predict the Fed won't start tapering the purchases until early next year.

The Fed wants to wait until it has more economic data, which were brought to a standstill during the shutdown. It might also wait until after Congress muddles through its next budget and debt ceiling battle. By that time, Janet Yellen, if confirmed, will have taken over Fed leadership from Ben Bernanke.

"Tapering and even an end to asset purchases are very different from a withdrawal of stimulus," Jamie Dannhauser of Lombard Street Research in London told Reuters. "The U.S. economy still has a very big hole that needs to be filled, and people like Bernanke and Yellen are very acutely aware of this point."

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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