The mighty bull market in equities is still standing after the third recession scare of the current cycle, says one market bull, who argued that its time for investors to become “aggressive buyers” once again.
“Investors suffered through the third ‘recession’ scare this cycle, and while all three major corrections have been larger than anticipated, absent an inversion of the yield curve that shuts down credit, the market pessimism following a non-recession crash should set the stage for new highs in 2019,” wrote Tony Dwyer, analyst at Canaccord Genuity, in a Tuesday note.
The previous frights came in 2011-12 and 2015-16. Meanwhile, the stock-market rally off the Christmas Eve lows “has been as extraordinary as the ‘whoosh’ that created that low,” Dwyer said. Stocks fell apart in the fourth quarter of last year, accelerating a decline into December that pushed the S&P 500 SPX, +0.47% and Dow Jones Industrial Average DJIA, +0.68% in to a correction and knocking the tech-heavy Nasdaq Composite COMP, +0.74% into a bear market.
The declines left major indexes negative for 2018, but the subsequent rebound saw the S&P 500 and Dow bounce nearly 16% from its December low through Monday, while the Nasdaq is up more than 18% over the same stretch.
Market bears remain unconvinced by the bounce, arguing that a dovish pivot by the Federal Reserve at its meeting last week will likely prove too late to halt a slowdown later this year. They argued that a decline in long-end Treasury yields signals unease over the economic outlook that will eventually come to haunt bullish investors.
Dwyer argued stocks can push to new highs in 2019. One of Wall Street’s most prominent bulls, he had targeted the S&P 500 to end 2018 at 3,200 before downgrading it to a range of 2,900 to 2,950 in October. The S&P ended last year at 2,506.85. Dwyer is targeting 2,950 in 2019, a rally of around 9% from Monday’s close.
The S&P 500 is trading at 16.1 times his 2019 estimate of $168 in earnings per share, or EPS, which he said is toward the low end of valuations when core inflation is running between 1% and 3%. Dwyer’s target is based on retesting the highs in a move similar to past “non-recession, postcrash environments,” representing a multiple expansion to 17.5 times Canaccord’s 2019 EPS estimate.
The market’s fourth-quarter “crash” suggested the Fed, which raised rates four times in 2018 and had maintained a bias toward tightening, had made a mistake, he said. The “reflex rally” indicates the Fed’s pivot last week to a “‘patient’ data-dependent stance fixed it for the time being,” he said. Moreover, the pivot suggests that an inversion of the 2-year Treasury yield TMUBMUSD02Y, -1.12% versus 10-year Treasury TMUBMUSD10Y, -0.83% is much less likely in coming months, he said.
An inversion occurs when the short-dated yield trades above the long-dated yield — a move that has reliably predicted past recessions, though Dwyer noted that after an inversion, recessions have started a median of 19 months later, leaving stocks room to continue rallying.
Dwyer said tactical indicators — price action, volatility and sentiment — say it’s time for investors to become “aggressive buyers.” Meanwhile, historic corporate debt issuance and merger-and-acquisition activity should continue to shrink the supply of equities, he said.