The recent rally in stocks is a sucker’s rally, according to chief investment officer Peter Toogood. The CIO of UK-based financial services firm Embark Group said he now expects a pullback in US equities after the S&P 500 is up 14% since early October. Toogood said he’s concerned about valuations, as U.S. stocks typically trade at 20x P/E multiples but yield an average of 5% annually. This compared to European stocks that return 8% or 9% on a P/E of 10x or 11x, he said. .SPX 1Y line “It’s probably been a sucker rally for a while, is my best guess,” said Toogood. “You have a nice little uptick in the US bear market” Toogood also warned that the S&P 500 could see potentially large declines in the near term. “It should probably be around 3200-3300,” he said. That’s down about 20% from Friday’s closing price of 4,045. The CIO said he was bearish on US equities as cash yields had moved above bond yields in recent weeks. The effective interest rate of the Federal Funds reached 4.57% on March 1 – higher than yields on bonds with maturities greater than 5 years. However, the premium for bearing the risk of investing in shares has not increased at the same time, according to Toogood. This means that equities must either become cheaper to offset the increased risk, or risk premiums (and bond yields) must fall to maintain current stock prices. Bond prices – and their yields – also partly reflect future expectations about the rate of inflation. Toogood said inflation concerns could continue to affect the market as supply chain disruptions have not yet been fully resolved. “You’ve got full employment… Put another way, you’ve got inflation that’s still sticky,” Toogood told CNBC’s “Squawk Box Europe.” Consumer prices have fallen from their peaks but remain high, and strategists say we still have a “way to go”. Meanwhile, logistics managers warn of a continuing source of inflation in the supply chain due to an imbalance between supply and demand in warehouses. “I don’t think the supply chains have particularly picked themselves out and the services sector certainly has supply issues,” added Toogood.
US equities are on a ‘suckers’ rally’ and a major pullback is possible, chief investment officer says
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