UBS Has Concerning Prediction About Where the Market is Headed

According to the head of UBS’s U.S. equity strategy, the market still has more losses in front of it.

Francois Trahan has said, “We expect the S&P 500 (^GSPC) to hit 2,550 by the end of 2019.” This outlook would represent a 9.2% drop from Monday’s closing price.

“A Fed-induced slowdown where leading indicators (LEIs) erode until they fully reflect last year’s rate hikes is the single biggest threat we see for equities,” Trahan wrote to clients this week.

He added, “There is a perception among some investors that the Fed’s tightening cycle is already priced into U.S. equities. This notion could prove to be a major surprise this year, a disappointing surprise that is.”
It’s been nearly four years of the Fed increasing interest rates.

“Indeed, history teaches us that it takes a long time, almost two years, for a change in interest rates to influence the economy,” Trahan also added. “Two years is well beyond the stock market’s ability to discount future events, as its window of visibility is really only about six months.”

“This is the disconnect, and likely the disappointment, for investors as leading indicators continue to erode throughout 2019, gradually digesting the lagged effects of the Fed’s tightening cycle, and simultaneously weighing on the equity market,” Trahan explained.

“Indeed, in an economy like the U.S., where interest rates pack a big punch, the Fed’s actions are almost guaranteed to lead to an economic slowdown,” he wrote. “While there are some positives that should help offset the effects of slower growth on equities, we have to admit that historical comps have us more concerned about being too positive with our target rather than too negative.“