Market Preview: A Rude Awakening?
Despite spiking oil prices, the major U.S. equity indices kept their measured pace up on Thursday, bouncing back after Federal Reserve Chairman Ben Bernanke pulled off the neat trick of seemingly souring the prospects for both stocks and gold by possibly laying some very preliminary groundwork for taking QE3 off the table.
Julian Jessop, an analyst with Capital Economics , said Thursday the market's reaction on Wednesday revealed a "surprising fragility in the prices of risk assets."
"This makes one wonder whether investors would have been happier if the Fed Chairman had talked down the economy and suggested that further monetary stimulus will be required," he wrote. "Perhaps they would -- after all, markets welcomed the FOMC statement in January which effectively said that the recovery was sufficiently delicate that official interest rates would probably have to remain at ultra-low levels until at least late 2014."
Going forward, Jessop thinks those bullish about stocks may have a rude awakening ahead because they can't realistically expect to get the benefit of both an improving economy and another round of stimulus.
"The one lesson we would draw is that if equity investors are banking both on stronger economic growth and further monetary easing to support current valuations, they are almost certain to be disappointed," he said.
The drop in gold was a bit puzzling as well to Jessop. He thinks the yellow metal still has plenty of room to run because of an expectation that financial conditions in Europe will still get worse before they get better.
"It is the risk of a renewed escalation of the eurozone crisis that underpins our forecasts that the price of gold will climb as high as $2,500 per oz over the next two years, and silver to $42, from around $1,710 and $36 respectively now," he wrote. "These forecasts are based on demand for a refuge from the uncertainty that the exit of one or more euro members would cause, rather than dependent on further QE from the Fed. But the latter is still on the cards for later in the year and would help the prices of precious metals to recover too."
Meantime, the bulls just get more bullish. UBS strategist Jonathan Golub lifted his year-end target for the S&P 500 by 8% on Thursday to 1475. Golub's previous projection was 1325, which represented 5.3% appreciation from 2011's close at 1258. He cited an improved macro environment for the move, saying current conditions support increases in both stock prices and corporate earnings.
"The most dramatic shift in market conditions has been the result of central bank actions including LTRO