It’s that time of year again. Every September, Barron’s polls its “all-star team” of Wall Street strategists to get their favorite sector bets, and their best estimates for the S&P 500 and the 10-year Treasury, among other market calls (see “Steaming Ahead“).
Let me summarize in words that should surprise no one: They see stocks trading sideways and bond yields rising.
I’m a big believer in taking anything a Wall Street strategist says with a grain of salt.
They are paid to look after the interests of their respective employers, which may be (and generally are) very different from yours and mine. That said, they also tend to be very bright and have access to the best research departments in the world. And in certain situations — such as when they show clear signs of groupthink — their calls can be useful contrarian indicators.
Let’s take a look at what Barron’s nine big-bank strategists see for the remainder of this year:
|S&P 500 Year-End 2014||2100||1950||2028|
|10-Year Treasury Year-End 2014||3.15%||2.50%||2.90%|
|GDP Growth, 2nd Half of 2014||3.5%||2.5%||3.1%|
|GDP Growth 2015||3.5%||2.6%||3.0%|
For a crowd with a reputation for being permabulls, expectations for the S&P 500 are quite modest. The highest estimate is only about 5% higher from today’s level, and the lowest estimate is less than 3% below today’s level. In other words, they don’t see a major move either way between today and the first of the year.
Interestingly, all nine strategists saw bond yields going higher from here. The average estimate — 3.1% — is within rounding error of where the 10-year started 2014. I should note that, back in December, the consensus was for yields to go sharply higher. The strategists swung and missed on that call, as yields have drifted lower for all of 2014.
On the GDP front, there was a fairly tight range of estimates — 2.5% to 3.5% for the second half of 2014, and 2.6% to 3.5% in 2015.
What conclusions can we reach from this?
Well, to start, I’m not seeing much in the way of independent opinion. There is near unanimity in forecasting for stocks to trade sideways and bond yields to rise. This is a clear sign of herding, and a contrarian warning sign to expect the unexpected. The strategists have consistently been wrong in forecasting a sharp rise in yields.
Given that U.S. yields have fallen even as the Fed has progressed with an aggressive tapering schedule and given that the European Central Bank is about to pick up where the Fed left off with a modified quantitative-easing program of its own, I would expect yields to continue to drift sideways in a range of about 2.2% to 3.2% over the next several years.
I also see signs of herding in the strategists’ favorite sectors. Literally all nine strategists listed technology as one of their favorite sectors. There was less consensus on the sectors to avoid, though six of the nine strategists recommended avoiding telecom.
Perhaps the contrarian trade of the next six to 12 months should be to sell or underweight tech and go long telecom and yield-sensitive investments.—