Main U.S. indexes decline: All down >1.5%
All S&P 500 sectors red; real estate weakest group
Dollar, crude rise; gold, bitcoin decline
U.S. 10-Year Treasury yield ~flat at ~3.70%
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BOFA SETS 4,000 S&P 500 TARGET FOR 2023 (1455 EST/1955 GMT)
Bank of America equity and quant strategist Savita Subramanian set a 4,000 price target for the S&P 500 on Monday, but cautioned there is a "lot of variability" in the range of outcomes. The 4,000 level is 1% above where the S&P 500 currently resides.
Subramanian said the firm's bull case is 4,600 for the index, based on its "Sell Side Indicator" being as "close to a buy signal as it was in prior market bottoms" as a bearish Wall Street is bullish for stocks. The 4,600 level is 16% above the last SPX price.
However, the bear case target is 3,000. This level is 24% below the SPX's last price.
Near-term pain is likely, according to Subramanian, as aggregate earnings would need to decline by another 10% to 15% to reach the firm's earnings per share view of $200 along with signposts suggesting the market has yet to bottom.
Despite the bearish short-term view, the firm notes that after revision troughs, low but rising earnings revision ratios which follow are the "best" phase. With the market typically bottoming six months before the end of a recession, Subramanian believes the time to buy is in the first half of 2023 as the firm's economists estimate the end of a recession by Q3 2023.
WITH RECESSION IN THE CARDS, MORE VOLATILITY MAY BE THE JOKER (1245 EST/1745 GMT)
In his latest "Deliberations," Bob Doll, chief investment officer at Crossmark, is providing a number of short-term expectations and longer-term observations this market faces.
As Doll sees it, the Fed has already tightened monetary conditions to a restrictive level and a 2023 recession appears in the cards.
Additionally, he thinks U.S. inflation is likely to continue to move lower based on the combination of weakening demand and the easing of supply constraints, but it will not retreat to the Fed’s 2% target.
As for the dollar, Doll believes its valuation is stretched. Thus it may be vulnerable given that economic growth and relative interest rate advantages that the U.S. has enjoyed are likely to shrink in 2023. Meanwhile, earnings expectations for 2023 have fallen from a $252 peak in the summer to $230 now. Crossmark sees potential risk down toward $200 in a recession.
"Stocks and bonds are no longer expensive, but aren’t cheap either," says Doll. He notes that cash returns have moved from 0% to ~4%, and the 10-year yield has moved from 1.5% in 2020 to 4.25% at its peak. The S&P 500 P/E has moved from 22x at the start of the year to 16x at its trough. "As such, we expect the volatile sidewise trading range that started mid-year to continue."
Looking out longer-term, Doll comes to five long-term conclusions:
1) The recent surge in G7 government bond yields improves the outlook for bonds over the next decade, but he says real returns will prove to be low vs recent decades
2) Investors should expect global equities to provide mid-single digit real returns in the coming decade, well below the norms seen since the early 1980s
3) Dividends will drive much of the equity return amid low real earnings growth
4) The U.S. is poised to underperform in the next decade
5) Active management will be primed to potentially outperform buy-and-hold and passive strategies.
SEMICONDUCTORS POISED FOR A PULLBACK - BTIG (1205 EST/1705 GMT)
The Philadelphia Semiconductor index has been on a tear of late, on track for its second straight month of gains, including a rally of nearly 14% in November along with the 2-month rally in the broader equity market.
Jonathan Krinsky, chief market technician at BTIG, notes the SOX rallied about 27% over 25 days through Friday, the largest move for the index since April 2020 and marking a relatively infrequent occurrence when the index was below its 200-day moving average.
Krinsky said that like many extreme moves, some happened within a bear market while others took place at the start of a new bull market. However, given that Krinsky believes the current bear market is not yet over, he sees semis as "broadly vulnerable" in light of the recent rally.
However, Krinsky also believes software is due for a bounce versus the semis as the latter has rallied about 33% from the October low while software was up about 12%, and that "divergence is set to compress in the coming months."
U.S. STOCKS DIP, EYE CHINA UNREST (0959 EST/1459 GMT)
Wall Street's main indexes are lower early on Monday as protests in major Chinese cities against strict COVID-19 policies rekindled concerns about economic growth, while Apple slipped on a report of disruption in production at a factory in China.
Protests against China's strict zero-COVID policy and restrictions on freedoms have spread to at least a dozen cities around the world in a show of solidarity with rare displays of defiance in China over the weekend.
In any event, the iShares China large-cap ETF is posting a more than 1% rise early in the session.
Meanwhile, the main U.S. indexes are down, but losses are relatively contained. A majority of S&P 500 sectors are red. With NYMEX crude futures down more than 1%, energy is taking the biggest hit.
In the wake of Black Friday holiday shopping, and now Cyber Monday, consumer discretionary is leading S&P 500 sector gainers.
The FANG index is also slightly positive.
Here is a snapshot of where markets stood shortly before 1000 EST:
EUROPEAN DIVIDEND MARKETS: "NOT MUCH JUICE LEFT" (0920 EST/1420 GMT)
Dividend futures in Europe still offer a small discount, especially on 2024, but for Barclays the recent market rally means the risk/reward isn't enough for investors to jump in.
"Not much juice left," says strategists at the UK bank led by Emmanuel Cau. "We see a mild earnings recession next year, which dividends and dividend futures for 2024 can probably withstand, although there are risks to the downside if the economy turns out to be worse than expected".
According to the UK bank, the discount at which 2023 dividend futures currently trade at is in line with the historical standards, while the bigger 10% gap on 2024 is "reasonable" given earnings risks next year.
S&P 500 INDEX: ICEBERG, DEAD AHEAD! (0900 EST/1400 GMT)
The S&P 500 index is once again nearing its 200-day moving average (DMA):
On Friday, the benchmark index hit 4,034.02, a more than two-month high. With that push, the SPX came within 0.6% of its 200-DMA, which ended Friday at about 4,057.
This closely watched long-term moving average is descending around 3 points per session, and will be in the 4,055 area on Monday.
Of note, mid-August SPX strength was capped nearly perfectly by the 200-DMA. On August 16, the SPX hit a high of 4,325.28, stalling just shy of the moving average which was just over 4,326 that day. The index then sank to new lows in October.
At that time, however, the 200-DMA was closely packed with the resistance line from the early-January high. Now, however, there is greater separation. That line will come in around 4,115 on Monday.
In any event, the market appears to be rigging for another collision with the 200-DMA, but it remains to be seen whether action will play out as perfectly as it did in August in terms of signaling the end of a counter-trend rally.
Indeed, the market may breathe a sigh of relief if the SPX can close above this hurdle. That said, the SPX would still have other obstacles to navigate around, including the resistance line.
In premarket trade on Monday, CME e-mini-S&P 500 futures are suggesting the SPX is poised to fall about 30 points, or around 0.7%, at the open. If so, the SPX will dip back below the 61.8% Fibonacci retracement of the August-October decline at 4,006.81.
There is additional support in the 3,919-3,906.54 area, which includes the 100-DMA, the 50% retracement of the August-October slide, and the November 17 low.
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(Terence Gabriel is a Reuters market analyst. The views expressed are his own)