Tags: Adams | stocks | S&P 500 | Yardeni

Wells Fargo Strategist: Beware the Impending Stock Slide Into Year-End

By John Morgan   |   Monday, 23 Sep 2013 12:05 PM

Stocks are about to hit the skids because of high valuations and the tug of volatile interest rates, says Gina Martin Adams, institutional equity strategist at Wells Fargo.

Adams predicts the Standard & Poor's 500 will end 2013 at about 1,440, a 16 percent drop from current levels.

Color Adams a skeptic on the year's big stock rally, because her price target means 2013's entire gains are going to vanish, she said on CNBC.

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"It's all about emotion at this point. The entirety of the S&P 500's increase this year has come via the multiple," Adams told the cable network. "It's been simply through the amount that investors are willing to bid up the value of the future earnings stream."

CNBC noted the index's price-earnings multiple has grown from 17 in January to nearly 20, which means stocks are higher because investors are willing to pay more for earnings.

According to Adams, the fact that the 10-year Treasury rates have jumped from 1.6 percent to 2.7 percent recently is a "tremendous shock" to the markets that stocks have not yet absorbed.

"Typically, when you get a 100 basis point [or 1 percent] move in Treasury rates, you get a contraction on the P/E multiple on stocks of about a full turn. That, by itself, implies you get something of a 10-percent-plus correction in stocks."

She added that the Fed's decision not to taper its massive $85 billion monthly bond purchases is probably too late to stop a stock drop.

"Unless bonds can actually rally substantially with the so-called Fed bid, and the Fed is able to manipulate yields significantly lower, the damage has been done, and I think the cat is quite frankly out of the bag."

But according to economist Ed Yardeni, investors who are looking at Fed policy as the reason why stocks will rise — or fall — may be looking in all the wrong places.

Yardeni, president and chief investment strategist at the eponymous Yardeni Research, wrote on his blog that investors "have become very addicted to QE [quantitative easing]," and that bears are bellowing that when the Fed does start to taper, it will kill the bull market.

Not so fast, Yardeni said. "The bears failed to either notice or acknowledge the huge injections of cash into the stock market by corporations. From Q1-2009 through Q2-2013, S&P 500 companies repurchased $1.5 trillion of their shares and paid out $1.1 trillion in dividends for a grand total of $2.6 trillion," he wrote.

In fact, Yardeni noted S&P data shows that S&P 500 dividends and buybacks hit $800 billion in the second quarter of 2013 — the highest quarterly level since the financial meltdown in 2008.

Ralph Acampora, a veteran technical analyst of the stock market, said on Twitter that the behavior of the Dow Jones Industrials and the Dow Jones Transports in the wake of the Fed's non-taper move convinced him the primary bull market is intact.

"Technical Discipline: my negative stance made in early August was negated yesterday = 'Never fight the primary trend,'" Acampora tweeted the day after the Fed decided to continue with QE.

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