Consecutive down years are very rare for the S&P 500, having taken place on just four occasions since 1928. Yet when they have occurred, drops in the second year have always been deeper than in the first, with an average decline of 24 per cent. The average year-end target for the S&P 500 among strategists surveyed by Bloomberg in December was 4,078, which would imply a 6 per cent gain for the index, though that largely reflects the big slump that took place at the end of the year. In November, the average forecast was for a decline.
Research from Bespoke Investment Group suggests year-end targets are usually about 5 percentage points off in either direction anyway. “We don’t generally do targets, just because we think they should be taken with a grain of salt,” said Bespoke cofounder Paul Hickey. “If there’s one thing I’ve learned through experience, it’s that when there is such widespread agreement on anything, things don’t usually play out as planned.”
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Recession odds are ebbing in the credit market, where the gap between default swap spreads of high-grade companies and their junk counterparts has fallen more than 100 basis points since September. Known as “compression” in market parlance, it points to less fear that a sharp economic downturn will leave the weakest credits vulnerable to default. Even so, the measure remains above pre-pandemic levels.
A Bank of America measure of strategists’ sentiment seems to back up Kelly’s view that market consensus is too pessimistic. It has tumbled so much that it’s now signalling a return of around 16 per cent in the next 12 months. The most important change that’s taken place since last year, he says, is that prices have fallen, creating opportunities “all over the place.” Index members in the S&P are trading at about 17 times projected 12-month profits, in line with its average reading this century.
“One resolution I’ve made at the start of 2023 is to avoid unreasonable gloom,” Kelly wrote in a note. “A new year, like a new baby, deserves to be greeted with optimism.”
Bloomberg, staff reporter
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