The US stock market is trading near fair value for the first time in five years, argue the analysts at Credit Suisse.
With valuations offering little upside and a myriad of risks offering plenty of downside, Credit Suisse thinks now’s a good time to cut back on your portfolio’s exposure to stocks.
“We reduce our weighting in equities to a small overweight, our most bearish strategic stance on the asset class in seven years,” Credit Suisse’s Andrew Garthwaite said in a new note to clients.
In investing, being “overweight” an asset class means that you have a greater percentage of your portfolio allocated to that asset than what is seen in a benchmark. In other words, you’re taking a more aggressive position because you have more conviction in the upside the asset returns. So, to be “small overweight” means you’re overweight, but only a little. In short: Credit Suisse is telling you that being just a little bullish is the most bearish they have been since 2008.
“Consequently, we reduce our mid-2016 target for the S&P 500 to 2,150 (from 2,200), and introduce a 2016 year-end target of 2,150,” Garthwaite wrote.
The S&P 500 closed at 2,102, implying that Credit Suisse sees market going up no more than 2.2% in the next year.
Like most strategists, Garthwaite’s top worry for US stocks is the prospect of tighter monetary policy from the Fed and all of its consequences.
“Our concerns are: increasing macro headwinds (deflation exported by China, the first Fed rate rise in 9.5 years); US equity valuations are now at fair value; there are several warning signals (credit spreads widening, buybacks as a style underperforming, M&A activity reaching problematic levels, a decline in market breadth, earnings momentum at a 4-year low); the shift of power from capital to labour; and conventional business models are being disrupted,” he said.
So, why not be more bearish?
Among other things, Garthwaite observed that even though the S&P 500 is “fairly valued,” stock prices tend to peak when they are “significantly overvalued.”
“The US equity market has tended to peak on valuations around 1.2 standard deviations above their 10-year average (1.8sd during a bubble period), while the S&P is currently trading on a P/E multiple 1.0sd above its 10-year average,” Garthwaite said.
Currently, the S&P 500 is trading at a P/E multiple of around 16.6, which is higher than average, but less than the 1.2 standard deviations away from the peak that we’ve seen historically.