NEW YORK (
) -The most bearish view of the S&P 500 has proven to be the winning call so far in 2011.
As of Wednesday's close, Adam Parker, who joined
as chief U.S. equity strategist in late 2010, following 10 years at Bernstein Research, was less than a point ahead of Douglas Cliggott, who started the year at
but has since left the Swiss bank.
Adam Parker--U.S. equity strategist, Morgan Stanley
Parker predicted the S&P 500 index would finish the year at 1238, while Cliggott predicted a 1250 finish. The S&P closed on Wednesday at 1243.72, 1.1% lower than where it started the year. Parker's call was the lowest of the 13 strategists polled by
Parker's bearish call rested largely on his expectation that the S&P 500 would see multiple contraction, as, indeed, it did. The index started the year at about 15 times earnings, and was at 13 as of Wednesday's close.
"Decelerating and volatile EPS growth, the specter of inflation and anasymmetric skew toward tail risk," were the reasons Parker cited in making his argument for a lower multiple.
"Tail risk," refers to the risk of a macro event changing the investing landscape and creating uncertainty, as the European debt crisis has done in 2011. Indeed, Parker saw that as a possibility at the start of the year.
"The possibility of tail risks always lingers, from known issues like European sovereign debt, quantitative easing, and debt ceiling discussions, to the yet unknown," he wrote. Parker added that a study of financial crises over the past 35 years showed "that these financial disruptions were accompanied by an average 18% reduction of theprice-to-forward earnings multiple for the period six months after the crisis relative to the six months prior."
Parker was less impressive (though not wildly off base) in his assumptions about inflation and earnings growth. Parker forecast 10% growth in earnings per share for the S&P 500, or $93, versus a $96 consensus. S&P 500 earnings were at $95 as of Wednesday's close, according to
. Inflation, meanwhile, was at 3.4%, within the range of "good inflation" as he described it in his report.
Noting that his colleague, U.S. Economist Dick Berner, had forecast inflation of 2-3%, Berner disagreed.
We believe the likelihood of 'good inflation,' i.e. sustained inflation in a 1.5-3.5% band, is extremely low, Parker wrote.
Parker was unavailable for an interview this week, according to a Morgan Stanley spokeswoman, but a Dec. 6 strategy note that focused primarily on the consumer discretionary sector contained hints of overall bearishness.
In citing his underweight on consumer discretionary stocks, for example, Parker wrote, "we have a cautious view on the overall market, and the beta of this group is high." Nonetheless, Parker noted he had been "too cautious" on the consumer discretionary sector.
data does not yet show a 2012 forecast from Parker for the S&P 500, though it does show him forecasting 2012 EPS of $103.20, higher than the mean of $102.31 among the 12 analysts surveyed, and well above the $98 forecast he made for 2012 EPS at the start of 2011.
Parker states in his latest note that he is overweight health care, utilities, andconsumer staples, while underweighting industrials along with consumer discretionary stocks.
Written by Dan Freed in New York
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