With ‘misery’ down, S&P 500 to hit 1,900: Wells Fargo
The 'misery index' is heading down, thanks to declining unemployment and moderating inflation. That's good news for stocks, say Wells Fargo strategists, who forecast big gains for the S&P 500.
The markets may have been slipping over the past week, but Wells Fargo Advisors is betting that the S&P 500 is headed up as high as 1,900 next year, which would put it about 18% above Wednesday’s close.
In its midyear economic and markets outlook, the firm’s investment strategy committee predicts that the index will climb as high as 1,700 by the end of 2013. It set a preliminary target of 1,850 to 1,900 for year-end 2014.
The U.S. economy is in a “sweet spot,” with unemployment trending down and inflation moderating at the same time, the report said. Taken together, these two factors create a single measure termed the “misery index,” which — when declining, as it is now — is often associated with improving investor sentiment, according to the analysis, released late yesterday.
Of course, the report points out that unexpected bad news could undermine this spring’s market gains that pushed the S&P 500 above its previous highs in 2000 and 2007. The index closed as high as 1,669 on May 21 before beginning to slide downward. It closed at 1,627 yesterday, 2.5% off that May high.
Investors who have been sitting on the sidelines and missed the recent equity gains still have time to get in on the opportunities, Wells Fargo said.
“We encourage investors underinvested in equities to begin to average into positions through the end of this year with an eye toward appreciation over the balance of this economic recovery,” the report said.
Jeffrey Roof, president of Roof Advisory Group Inc., said his clients are already at maximum equity exposure, more or less by default, given the expected performance of other investment options.
“We still see equities now and going forward having far greater potential of upward appreciation and less downside risk than alternatives like fixed-income categories and certainly cash,” Mr. Roof said. “We see clients in large cash positions losing dollars.”
The firm has reduced client exposure in utilities stocks and telecommunications securities because it doesn’t expect these sectors to have much more room for appreciation, he said. As the economy continues to improve, he expects issues of industrials and basic-materials companies to be out ahead.
“The more conservative sectors for the near term will probably be less attractive to overall equities,” Mr. Roof said.
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