IStockphoto Prominent analyst says the coast is clear for this bull to move higher.
Stocks stalled a bit this week as they began what’s historically one of their most difficult months, but remain on track to rally double digits by the end of the year, according to a prominent bull.
Tony Dwyer, equity strategist at Canaccord Genuity, reiterated his S&P 500 target of 3,200 for the end of 2018, citing the strong manufacturing data released on Tuesday, a rise of nearly 11% from its current level.
He also projected the index to rise to 3,360 in 2019, highlighting his view that a much-feared recession isn’t lurking anywhere close.
“The Institute for Supply Management showed that the manufacturing sector remains on very solid ground,” he said in a report. “History shows that since 1950, the ISM typically peaks well before the economy enters recession or the S&P 500 hits the cycle high, especially over the past three levered economic periods.”
The ISM reported its manufacturing index jumped to a 14-year high of 61.3% in August from 58.1% in July, far exceeding the 57.9% forecast by analysts in a MarketWatch survey. A reading of more than 50% indicates an expansion in activity.
Dwyer noted that the manufacturing indicator peaked a median 31.5 months before the start of a recession and the S&P 500 usually gained about 35.4% in the subsequent 2 years after the ISM peaked.
Canaccord Genuity
There are a couple of exceptions to this trend as the table above shows, but those occurred during periods where inflation and the interest rate environment was quite different from the current situation, he added.
“The ISM is yet another widely followed economic indicator that suggests a recession likely remains years away,” he said.
Canaccord Genuity
Other signs of a recession, including an inversion of the yield curve, as measured by 2-year TMUBMUSD02Y, +0.15% and 10-year Treasury TMUBMUSD10Y, +0.13% yields, have yet to manifest, indicating that the stock market is safe from a sudden economic downturn for now.
See: Here’s when the yield curve actually becomes a stock-market danger signal
Also read: Key contrarian indicator falls to 9-month low as stock investors grapple with heightened global risk
Stocks were mixed Wednesday, with the S&P 500 SPX, -0.28% off 0.3% and the Nasdaq COMP, -1.19% down 1.2% while the Dow Jones Industrial Average DJIA, +0.09% bucked the trend to edge up 0.1%. For the week so far, the S&P fell 0.5% while the Nasdaq shed 1.4%.
A weak start to the month wouldn’t be unexpected given September’s reputation for poor equity performance. Yet, the backdrop of a robust economy and strong corporate earnings are expected to trump seasonal headwinds and uncertainty over President Donald Trump’s trade war.
Check out: Will midterm elections sink the stock market? Here’s what history says
In fact, Mislav Matejka, chief European equity strategist for J.P. Morgan Securities in London, believes any retrenchment in the market over the U.S.’s trade spat with China should be viewed as a buying opportunity.
“Amid a deluge of bearish stories, it is startling that equities are holding up so well,” he wrote in a note. “Near term, we could see knee-jerk risk-off move on the potential headline of $200 billion tariff implementation, but we believe that one should add into this, as an eventual compromise on trade remains the most likely outcome.”
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