S&P 500 bubble could create a 'systemic risk' by 2023, Stifel says: At the Open
Central banks could drive stocks higher all the way through to the middle of 2023, but that would create a serious economic risk when the bubble bursts, according to Stifel.
"We calculate that a bubble driven by current central bank real yield repression may take the $SPDR S&P 500 ETF(SPY.US$to 5,500 mid-2022 and 6,750 mid-2023, creating a systemic risk when it bursts," Stifel says.
Real rates saw a jump higher yesterday, but are still historically low. The 10-year inflation-protected $iShares TIPS Bond ETF(TIP.US$is at -0.98%.
There have been just two equity bubbles in Wall Street's history: 1928-1928 and 1998-1999 and "neither ended well for stock or economic conditions," Stifel says.
Now, a third bubble is "percolating," the team adds.
The question is whether the Federal Reserve will lean against the risk of a bubble or just let asset prices rip, "magnifying financial risk when it bursts."
What can the Fed do? Watching the 10-year real yield is key to assessing market risk and the possibility of an S&P correction, Stifel says.
Stifel says that to forestall risk, the Fed may "tilt more hawkish while at the same time the Biden/Yellen duo may support the stronger dollar ( $USD(USDindex.FX$) that accompanies such a Fed shift (a strong dollar subdues energy & food inflation in a supply-constrained inflation environment and improves the chances that BBB overcomes inflation concerns among Senate moderates, while also affecting the timing of a reconciliation bill to lift the U.S. debt ceiling)."
"This combination of factors may raise U.S. real yields and lower the S&P 500 P/E."
Watch Cyclicals and Defensives. Cyclical stocks have led the market rebound from the pandemic low on an equal-weight basis.
Actions like the above by the Fed and administration would cut into the reflation that favors Cyclicals over Defensives.
Stifel recommends going overweight some defensive stocks in sectors like Utilities ( $Utilities Select Sector SPDR Fund(XLU.US$), Consumer Staples ( $Consumer Staples Select Sector SPDR Fund(XLP.US$) and Health Care ( $The Health Care Select Sector SPDR® Fund(XLV.US$) for the current quarter and Q1 2022.
They underweight some cyclical subsectors in Financials ( $Financial Select Sector SPDR Fund(XLF.US$), Energy ( $Energy Select Sector SPDR Fund(XLE.US$) and Materials ( $Materials Select Sector SPDR ETF(XLB.US$).
BMO says that the still-hot tech sector can outperform next year, even with rising rates.
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Brain Gomes : There's already a bubble, in overpriced growth/tech stocks and related crap like NFTs and shitcoins, and it's already a systemic risk.
Machiavellis3rdEye Brain Gomes: Preach!
arts food business : 2023? What about the bubble NOW?
leeloohui : well
Oavbab : Central bankers are political appointees. They will do what their masters demand of them, which is to print money and pump assets regardless of larger costs to society.
Rickydi : Or wealth creator. Don't fight the printer. Join it.
zukG4HQuCI Rickydi: While Yellen and Powell are big believers in the "wealth effect" from inflating financial assets, and not likely to reverse course on their thesis anytime soon, the findings from the literature suggest it's very weak at best. It's not nearly as strong as they believe.
O15Cbt1QkM : "There have been just two equity bubbles in Wall Street's history: 1928-1928 and 1998-1999"
Obviously this person was sleeping in 1962, 1973, 1987, 2002, and 2008.
Market will crash when the Fed lifts the rates. All these stock market crashes have had the same pattern. Aggressive stock buying paired with high inflation, and then the Fed raising interest rates caused the markets to plummet.
EshoROsvP7 : Summer of 2022 we should have a better indicator, I don't have a crystal ball but I made a ton lately, so lets wait until Q1 2022.
Always stay in the market and always have gunpowder prepared for opportunity.
t1i5xTWxyB : Fed should support market and mandate 20% annual return on SPY. It is better to have stock market going up 20% per year with inflation of 6% than stock market going down and inflation of +2%.
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