We’ve outlined Edward Yardeni’s 12 reasons to be bullish, so here are some reasons to be bearish, or at least cautious.
The market’s rebound has been impressive, but even if the S&P 500 edges a little higher in the near term, John Higgins, senior markets economist at Capital Economics expects to see it back down around 1,000 by the end of the year.
The market’s gains this time around have been considerably greater than normal
In the past 12 months, the S&P 500 has risen by nearly 70%. During the previous 13 economic downturns since 1929-1933, it rose by an average of 44% in the first year after hitting a low.
Equities have tended to do less well in the second year after hitting a cyclical low
An average rise of 5% or so has been typical. “There is always the chance that the market will fare better than average this time around… But we doubt last year’s spectacular gains will be sustained for long.”
Valuations are not compellingly attractive
The stock market’s cyclically-adjusted price (reported) earnings ratio is about a third higher than its long-run average based on data provided by Robert Shiller of Yale University. The gradual scaling back of unconventional monetary policy stimulus is likely to curb investors’ appetite for risk this year even if the Fed leaves key policy rates on hold.
The economic recovery is also likely to run out of steam before too long
In the absence of a further increase in margins – which have already rebounded – weak economic growth should weigh on corporate earnings.