The budget and debt battles in Washington should not knock the US stock market off its path for long, according to strategists who expect the benchmark S&P 500 to end the year with a 21 percent increase, a Reuters poll found. The equity market has come under some pressure in the last three weeks as lawmakers face a coming deadline to raise the $16.7 trillion federal borrowing limit.
As that date approaches, more volatility is expected and equities could retreat if the US credit rating were to be downgraded. "The market has performed incredibly well in the face of a lot of bigger-picture questions this year," said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management in New York.
However, strategists see the market weathering this storm, with losses being viewed as a buying opportunity once a resolution is reached. The S&P 500 is expected to end the year at 1,725, according to the median forecast from 43 strategists surveyed over the past week in the latest Reuters poll. That would be a 4.2 percent rise from Tuesday's close of 1655.45 and a 21 percent increase on the year.
As for 2014, the market is likely to advance only modestly if the Federal Reserve begins to scale back its stimulus, as expected. Currently the Fed is buying $85 billion in bonds monthly to keep a lid on interest rates. For next year, the index is seen rising to 1,845, which would represent a modest 7 percent gain from that 1,725 level. The Dow is seen ending 2013 at 15,500 and 2014 at 16,500, the poll showed. BNY Mellon Wealth Management's Grohowski, like others, expects some market upside after a resolution to the budget and debt issues in Washington, but not much. The budget impasse has led to a partial US government shutdown since October 1.
Many investors fear the shutdown could hurt consumer spending and threaten the fragile US economic recovery, especially as the budget problems are becoming entangled with the issue of raising the debt limit. This year's rally, which saw the benchmark Standard & Poor's 500 index and Dow Jones industrial average repeatedly posting record highs, may begin to be questioned if sluggish economic growth leads to weak corporate results. If earnings dip, that will stretch valuations, and investors could sell stocks if they see stocks as overvalued.
The current forward 12-month price-to-earnings ratio is 14.2, compared with 13.1 at the beginning of 2013. That level is still a touch low historically. Earnings are expected to grow by 5.9 percent for the year, down from 7.4 percent on July 1, according to Thomson Reuters data. Market experts predict the Fed will announce a ratcheting back of its bond-buying program by the end of 2013, and possibly start raising interest rates at some point in 2015. A Reuters poll conducted after the central bank decided in September to leave its current stimulus program in place found that 9 out of 17 primary dealers expect the Fed to reverse course during its December 11-12 policy meeting.
Comments
Comments are closed.