In a new note, Citi’s well-known equity strategist Tobias Levkovich has turned decidedly less bullish.
While not too gloomy, he writes:
The path of least resistance may be to the downside near term. With traditional summer seasonality and some significant uncertainties, especially the US deficit and spending plans plus their impact on long-term discount rates for asset valuation purposes, it does not appear likely that equity markets can bounce higher this summer unless a truly remarkable agreement emanates from Washington on fiscal responsibility. Moreover, economic data tends to ease back in the second half which probably weighs on the mindset of investors.
He goes on:
The simple good news can be found in three areas: the cost of capital via eased credit conditions, the substantial amounts of cash sitting on the sidelines that can be used to buy stocks, and the seeming need for pension funds to allocate more money to their equity exposure given return requirements that surpass most bond yields. The difficulties appear to centre on likely margin pressures, the lack of depressed sentiment, and, lastly, valuation that is not necessarily as attractive as many presume. Add in uncertainties about emerging economies’ rising inflation, sovereign debt woes in periphery Europe, as well as geopolitical developments, and there does not seem to be an easy set of catalysts to lift share prices at the moment especially on the cusp of typical seasonality and issues such as the end of QE and the need to raise the US government debt ceiling.
This chart of how little cash instituational managers are sitting on is interesting: