S&P 500 faces greater downside risk ahead, Bank of America says
The odds of a pullback in the S & P 500 are higher now, according to Bank of America. The recent market volatility has investors worried the S & P 500 is set to post more losses after its rally this year. The broad market index and the Nasdaq Composite are both coming off a losing week . The Dow Jones Industrial Average, on the other hand, closed out last week with gains. When it comes to historical patterns, the broad market index is indeed due for a downshift, according to Savita Subramanian, the head of U.S. equity and quantitative strategy at BofA Securities. Since 1936, a pullback of 5% or more has on average occurred three times per year, she noted. A correction of 10% or more has occurred once per year on average, she said. “We are thus overdue for a pullback,” wrote Subramanian, adding there is “elevated downside risk in coming months. The strategist, who said the bank’s market timing signals have fallen to neutral from bullish, added that there are other concerns. Seasonally speaking, she noted investors are heading into what have proven historically weak months for the S & P 500, in August and September. Additionally, the CBOE Volatility Index , also known as Wall Street’s fear gauge , typically spikes by about 25% from July to November in a presidential election year, Subramanian added. The VIX was last trading around 17, after starting July closer to 12. .VIX 1M mountain VIX Still, Subramanian noted that a full on bear market is “unlikely,” saying BofA’s macroeconomic triggers have yet to flash warning signals. In fact, the strategist expects the S & P 500 will end the year at 5,400. The broad market index closed Friday just somewhat higher, at 5,459.10. “We recently revisited macro triggers that have preceded prior S & P 500 peaks,” Subramanian wrote. “The more consistent signals suggest we are a way’s away. Just 50% have been triggered [today] vs. an average of 70% ahead of prior S & P 500 peaks.” In this environment, the strategist expects dividend paying stocks can outperform. Subramanian noted they have historically contributed more to the S & P 500’s total return, and can do so going forward. From 1936 to 2010, dividends contributed around 40% to S & P 500 total returns, but have only accounted for 15% since 2010. “Dividends are slated to make up a larger proportion of returns than outsized price returns and [price-to-earnings] multiple expansion of the past decade,” Subramanian wrote.
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