Morgan Stanley’s Adam Parker has been sticking to his guns by reiterating his call for the S&P 500 to end the year at 1,167.
But he also admits the Fed has scuttled his bearish call so far, and could do so again in the future.
In a note today, he takes out his feelings on Fed chairman Ben Bernanke’s decision to initiate unlimited asset-backed securities purchases:
We don’t do heroin. We are sure the period of being high on heroin is “enjoyable.” Even one light beer is a mood enhancer for us. However, we try to see through to the other side of it and make a judgment that injecting heroin into our arms is not a good idea.
What’s our point? We think the probability that we can end up in a benign interest rate environment goes down every time the Fed does more unconventional policy. That’s why it is called unconventional. We had thought that most investors would decide this “heroin” wasn’t worth it. We forgot about what it means to be an addict. We were wrong and clearly mis-calibrated the strike price of the Fed “put”. Maybe not ultimately wrong, and maybe not even by year-end, but for sure over the past few months we were wrong about the demand for this kind of artificial stimulus.
We should have known when the economic data were clearly weaker and corporate profits plummeted during pre-release season in June and July that the market rally was about the promise of more unconventional policy. The central debate remains the same, though. Will equities continue to go higher simply because the specter of unlimited liquidity is there or will investors see through to the other side of the “high” and worry that we are going to be in an extreme interest rate environment for a while and that earnings growth will remain tepid?
Often addicts know what they’re doing is wrong, but they do it anyway.
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