Tags: Clemons | stocks | CAPE | market

BBH Strategist Clemons: 'There Isn't a Lot of Room for Error' in Stocks

By    |   Tuesday, 07 April 2015 07:00 AM

With the stock market flirting near record highs while analysts forecast a slide in earnings, equities are skating on thin ice, experts say.

"There is not a lot of room for error," Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Banking, told The Wall Street Journal. "I am cautious."

The S&P 500 index stands less than 3 percent below its all-time peak.

That has pushed Robert Shiller's cyclically adjusted price-earnings (CAPE) ratio, which includes 10 years of earnings, to 27.1. That level was topped only in 1929, 2000 and 2007, periods preceding a market crash.

Clemons believes consumer spending will rebound and stocks are expensive. In the meantime, he has saved up as much as 20 percent cash in many client accounts in order to invest that money whenever stocks pull back.

Analysts predict a 4.6 percent drop in S&P 500 profits for the first quarter, following a 3.7 percent increase in the fourth quarter, according to FactSet.

Signs of economic sluggishness aren't helping the stock market. Non-farm payrolls grew by only 126,000 jobs in March. And retail sales dropped 0.6 percent in February, the third straight monthly decline.

The Atlanta Federal Reserve's GDPNow model forecasts economic growth of only 0.1 percent, as of Thursday. And that's an improvement from Wednesday when the projection was zero growth.

Nobel laureate economist Shiller, a professor at Yale University, is puzzled by equities' strength. "This stock market is an enigma," he told MarketWatch. "Short-run forecasts are very difficult," but the CAPE ratio signals trouble.

"When CAPE is this high, 10-year returns on the S&P 500 are nearly flat, because inevitably there is a major correction," Shiller said.

The S&P 500 hasn't endured a 10 percent correction since October 2011, although it almost reached that magnitude last September-October.

To be sure, "while history suggests current levels signal a correction, it does not mean we will have one soon," Shiller said. "CAPE could go higher, as it did in 2000, so until then, stocks could keep rising."

Carter Worth, head of technical analysis at Cornerstone Macro, also sees signs of danger for stocks.

The problem is that major sectors of the index have failed to reach new peaks, he told CNBC. "The issue is trying to come to a judgment not so much by looking at the market, but by looking at the parts that comprise the whole," he explains.

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With the stock market flirting near record highs while analysts forecast a slide in earnings, equities are skating on thin ice, experts say.
Clemons, stocks, CAPE, market
Tuesday, 07 April 2015 07:00 AM
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