Brace yourself for a drop of about 8%, or around 200 points, in the S&P 500 Index (SPX) by year-end. This warning was issued by Scott Wren, senior global equity strategist at the Wells Fargo Investment Institute, a division of Wells Fargo & Co. (WFC), in comments he made on CNBC. This would bring the widely-followed market barometer down as far as 2,230. The top of his year-end target range is 2,330, representing a dip of about 4% from Wednesday's close, CNBC adds.
Wren's concerns include "stretched" valuations, further interest rate increases by the Federal Reserve and rising wages that could crimp corporate profits margins going into 2018, as he told CNBC. These bearish predictions put Wren at odds with the still-bullish consensus among market strategists recently polled by CNBC. A majority of these Wall Street gurus predict that the S&P 500 will tack on roughly another 5% over the rest of the year, to end 2017 at around 2,550. (For more, see also: Banks, Techs Will Lead 2nd Half, Strategists Say.)
Too Good to Last?
Meanwhile, the strong performance of stocks in the first half of 2017 is reason enough for some market watchers to fret about the second half, the Wall Street Journal reports. Global stock markets in the first half posted their best performance in years, with all but four of the 30 major indexes representing the world’s biggest stock markets by value rising this year. This rise signaled first half performance unmatched since 2009, per data from FactSet Research Systems Inc. analyzed by the Journal.
During the past 20 years, only four first-half rallies have been equal to or better than the opening six months of 2017, the Journal observes, also noting that two of them them preceded severe market crashes, while the other two were in the early stages of long market upswings. An additional source of worry for the pessimists: many of those 30 major indexes across the globe are at or near all-time highs right now, the Journal adds. (For more, see also: U.S. Stocks in 2017 Face a Rocky Second Half.)
Vexed By VIX
For most of 2017, CBOE Volatility Index (VIX) has been registering extraordinarily low expectations of market volatility over the ensuing 30 days. Nonetheless, there have been the occasional short-lived panics, such as a 55% swing last Thursday from the opening to the high for the day, per another Journal article. Even though the VIX quickly settled down, with Friday's low being among the lowest 1% of VIX readings ever, going back to its creation in 1993, the Journal still finds cause for concern in this incident. (For more, see also: How Investors Are Hedging Against a Stock Selloff.)
For one, Thursday's wild swing in the VIX appears to have been set off by fears that central bankers around the globe actually might be serious about tightening monetary policy if their economies improve, the Journal says. This outsize reaction to what is essentially old news indicates that maybe the markets really have become hooked on incredibly easy money and near-zero interest rates. (For more, see also: Bill Gross: QE is "Financial Methadone".)
Second, Thursday's action in the VIX indicates how quickly volatility can escalate once investors get scared, the Journal adds. Third, the rapid recovery in the VIX suggests to the Journal that a complacent, "buy on the dip" mentality still holds sway over many investors.