further gains. Image by Getty Images via @daylife
From the depths of March 2009 the S&P 500 has just about doubled,
rising from 666 to 1,322 in two years. And though everything from
escalating oil prices to the anticipated end of the Centralized
Reserve's asset buys threatens the advance, Barclays Capital is
still advising clients to buy on the dips and stick with the surging
equity market.
Part of the firm's case for a continued rally goes back to the
historically accommodative monetary policy from the Fed. The central
bank has kept interest rates near zero and become the largest buyer of
U.S. Treasury debt, scooping up the supply of "risk-free"
securities and approaching investors to equities and other risk
assets.
Larry Kantor, Barclays Capital's head of research, acknowledges
there are factors that could derail that trend, but for the time being
he does not see whatever thing that will kill the two-year surge in
equities. "Nearly every box on the checklist [that makes stocks
attractive] is filled," says Kantor. An economic recovery is
underway, the Fed is holding the line on interest rates and corporate
weigh sheets are flush with cash, far less debt-burdened than they
were pre-crisis and lean enough that any incremental revenue gains are
flowing straight to the bottom line.
_For more on the leaders and laggards in the market's rally see Bull
Market Turns Two: Winners and Bull Market Turns Two: Losers_
The chief risks to further gains – which Barclays Capital expects
with a 1,450 year-end target for the S&P 500 – are the possibility
of further debt flare-ups in Europe, an even steeper spike in oil
prices that takes a bite out of U.S. GDP and, most importantly,
missteps from the Fed when it finally shifts gears on policy.
While the unrest in the Middle East is a concern, Kantor is skeptical
that oil at current levels – West Texas crude traded near $105 a
barrel Tuesday — is vacant to have a prolonged impact on the equity
market. He argues that a chunk of the current price is tied more to
better economic growth prospects, since crude traded through the $90
level before the violent uprisings in countries like Egypt and Libya.
The European debt picture seems to be stabilizing – the ECB is
widely expected to tighten interest rates in an inflation-fighting
measure at its next meeting – and for the time being it appears that
officials will be able to "draw the line at Spain," says Kantor.
A larger risk than oil or Europe, says Kantor, is how the Fed
extricates itself from what is the most accommodative monetary policy
in U.S. description. That can't last forever he says, but it remains
to be seen how timely Ben Bernanke and the central bank will be in
withdrawing its stimulus.
"If the Fed gets in front of it, I don't reckon it's a
killer," says Kantor, who expects a larger correction in
fixed-income than stocks."
The threat, he warns, is if they keep the accelerator pushed to the
floor and the same conversation is on the table a year from now, when
the S&P will presumably be considerably higher. "If [the Fed] get
ahead of it maybe you see a 10-15% correction, if not it could be a
lot larger."
_For more on the leaders and laggards in the market's rally see Bull
Market Turns Two: Winners and Bull Market Turns Two: Losers_
__
_Follow ?migr? On Wall Street, or Twitter @SchaeferStreet_. _And for
more Forbes coverage check our section pages for Markets, Stocks
andCommodities on the Investing channel._
Source: Forbes.com
