Stocks received a respite from the selling today as Michael Kors (KORS), Yum Brands (YUM), Merck (MRK), Pfizer (PFE) and Xylem (XYL) gained.
European Pressphoto Agency The Dow Jones Industrial Average rose 0.5% today to 15445.24, as Merck and Pfizer gained 2.8% following upgrades. The S&P 500 Index gained 0.8% to 1755.20, as Michael Kors gained 17% to $89.91 after beating earnings, Xylem rose 11% to $36.27 after besting revenue forecasts and Yum Brands advanced 8.9% to $72.06 as profit margins in China increased. Today’s gains haven’t done much to eat into the major benchmarks big losses in 2014: the Dow is down 6.8% so far this year, while the S&P 500 is off 5%.
Still, few seem too worried about the downdraft in stocks. Case in point: Capital Economics’ Julian Jessop, who sees stocks recovering during the rest of 2014. He writes:
The recent sell-off both in developed and emerging equity markets has a wide range of drivers, from worries about Fed tapering to the risks of a "hard landing" in China. Nonetheless, our sense is that the worst of the fears are overdone and that equities will recover over the remainder of the year…
Admittedly, there is a danger that in downplaying the significance of the individual factors behind the current sell-off, investors risk missing the bigger picture. Asset prices may simply be too high after years of very loose monetary policy across the developed world. The precise triggers for an inevitable correction may be of secondary importance. Nonetheless, there is still little evidence of widespread bubbles. Equity market valuations are stretched, but not excessively so. What's more, US and European monetary policy is set to remain supportive for at least or year or two yet – and probably much longer in the case of Japan.
The upshot is that we are not about to make major revisions to our developed equity market forecasts, which were conservative to begin with. We are therefore sticking with our end-2014 forecasts of 1,850 for the US S&P 500 (which would represent a gain of around 6% from today), 6,900 for the FTSE 100 (7%), and 17,000 for the Nikkei (a more enticing 21%).
Well Fargo’s Ron Florance is looking for buying opportunities:
The latest developments in the capital markets do not surprise us. Nor do they change our 2014 forecasts or capital-market assumptions—in fact, we had anticipated an increase in volatility and expected some consolidation of 2013 gains. Instead of running from this latest bout of volatility, we are looking for opportunities as many high-quality stocks just went on sale. Fundamentals have not changed, in our view, and we believe, if anything, our domestic equity forecasts may be on the conservative side. Meanwhile, we see bond prices becoming increasingly unattractive in this environment and will be evaluating possible tactical shifts in the coming weeks.
I happen to agree with both of them. Then again, I also wasn’t worried after the Broncos finished the first quarter of the Super Bowl down just 8-zip to the Seahawks–and look how that turned out.
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