Skepticism + No Recession = Optimism: Canaccord Genuity

Canaccord Genuity strategists, Tony Dwyer, channeled his inner bull and believes that the combination of skepticism with the lack of a recession will lead to optimism and upside to the S&P.

Skepticism

The analyst believes that investors remain skeptical even though the market has traded off the February lows and points to 4 issues:

1) Investors are aggressively adding money to levered inverse ETFs

2) Individual investor sentiment - the percentage of Bulls in the American Association of Individual Investors (AAII) is under 20%

3) Newsletter writers are not overly bullish - According to Investors Intelligence, 39% of newsletter writers are bullish, which is off the historic low of 24% in February

4) An annual Gallop Survey that asks adults if they have any money invested in the stock market – either in an

individual stock, a stock mutual fund, or in a self-directed 401K or IRA – showed just 52% were invested in some form in the equity market.

No Recession

The analyst believes that maintaining a bullish conviction as the market corrects is a result of being convinced there is very little likelihood of a U.S. recession over the next 18-24 months. He is based on (1) the history of the Real Fed Funds Rate using core inflation, (2) the 6-month/10-year yield curve, and (3) the Chicago Fed National Financial Condition sub-indices that measure financial market and banking stresses.

Assuming no change in the recession scenario, the following 4 things could lead to investor optimism:

1) commodities hold most of their gains off the low, (2) emerging economies recover with their currencies, (3) we move through the Brexit vote and Europe stays positive, and (4) the U.S. reaccelerates despite prospect of two Fed hikes.

This optimism would lead to increased spending and upside for market indexes.

The analyst believes the SPX operating EPS would rise by 7.5% in 2017 to $130/share vs. the 2016 est. of $121. This better than expected EPS combined with low inflation could lead to a higher multiple but the 2017 SPX target stands today at 2,340 on an 18x EPS.

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