A market veteran predicts when stocks will pull back and how to trade them
The U.S. stock market is showing warning signs, according to chief market strategist Chris Watling. Watling, also managing director of London-based Longview Economics, expects stocks to fall into a bear market over the next three to six months thanks to lofty valuations that have risen since September last year. The S&P 500 traded at 3,985 on Wednesday morning at a price-earnings ratio of nearly 20x even as the US central bank attempts to tighten financial conditions. According to Watling, valuations are now in “bubble” territory and have never been higher except during the stock price boom of the dot-com and pandemic era. “You’ve got a market here with a forward P/E of 18.5 times, which really hasn’t been much higher than in a bubble,” Watling told CNBC’s “Squawk Box Europe.” “It’s a terrible environment for equities,” he added. Asked about a potential downside, Watling said investors should be cautious because if S&P 500 earnings return to their historical average, the benchmark could drop 900 points, a decline of nearly 25% from current levels. “If you say the [S & P 500] forward earnings should be 200, and you say the average multiple is 15 times, you get a number of about 3000,” Watling said. .SPX 1Y line While investors may be tempted to stay on the market due to a lack of better options, Watling suggests otherwise: “If you want to make money, you should run out of stocks in three to six months,” he says. “You should be overweight government bonds, should probably have some cash, and there are some commodities you should play, most likely precious metals. He cautioned, however, that this strategy is very aggressive and not suitable for the average investor. Watling advised investors to make diversified bets and not bet the house on a single investment. have risen over the past five months, partly in response to the lack of distress in the high yield bond market. Instead, for example, the difference in interest between bonds issued by junk-rated US companies and US government bonds has fallen from a peak of 3% at the start of this year to 2.6 percentage points. , according to the Federal Reserve Bank of St. Louis. This appears to defy the credit conditions desired by the Federal Reserve, and Watling suggests that it could be a short-term liquidity story that is boosting the market. Watling said the recent increase in central bank balance sheets around the world since October is due to the reopening of China, the Bank of Japan’s money printing and the Treasury’s general reserve account freeing up liquidity to offset the Federal Reserve quantitative tightening program. “It may well be just a short-term liquidity story that seems to have decoupled the spreads from what credit conditions are telling you,” he added.
