Amidst all the excitement over the Federal Reserve announcing they will be continuing the bond-buying program and the subsequent stock market rally, Wells Fargo strategist Gina Martin Adams has been reiterating her view that the stock market is due for a major correction.
Adams told Futures Now, “Our target is based on fundamentals. We’re basing our target on typical valuation measures, given the level of interest rates and also on earnings forecasts. And that’s why our target is relatively low.”
The “target” she is referring to is her bearish estimate that the S&P 500 index will finish the year at 1,440. This would be a 15% drop from Wednesday’s 1,702 level. The fact that she is still backing this timeframe means that this drop will happen over the next three months. This should make many investors reevaluate their portfolios, which, for most, have become over weighted with equities due to the struggling bond market.
“It’s all about emotion at this point. The entirety of the S&P 500’s increase this year has come via the multiple,” Adams said. “It’s been simply through the amount that investors are willing to bid up the value of the future earnings stream.”
As interest rates start to rise, the multiple will decrease. In fact, Treasury yields have already begun to rise, but stocks are usually slow to react. “Simply the fact that we moved from 1.6 [percent] on the 10-year Treasury rate to now the 2.7 [percent] range is a potential tremendous shock over the next six months,” Adams warns.
As the market continues to climb, the number of concerns about a correction should also increase. With the bond market showing few signs of recovery, there are only a few areas that investors can turn to protect themselves against a market decline and hedge against inflation. The most obvious area of focus is the physical gold market.
Gold is traditionally strong in September and at the end of the year due to the wedding and festival season in India. China also continues to gobble up physical gold, keeping the demand high. The yellow precious metal can also be used as a hedge against inflation as its value tends to increase as the value of the U.S. dollar decreases. With the Fed continuing to pump money into circulation, the dollar should continue to lose value. The uncertainty in the Middle East also weighs heavily on the mind of investors concerned that a conflict could cause a stock market drop as well.
With dire technical warnings, threats of war, and increased demand from Asia, physical gold and silver coins are looking more and more like a safe-haven at its current price point.