Perennial bull Tom Lee conceded Wednesday that the stock market probably won’t end the year with double-digit gains.
As recently as last month, the Fundstrat Global Advisors co-founder was calling for an annual rise of 10 percent to 12 percent.
The Dow is down about 400 points, or 2.2 percent for 2015 with 5½ trading days left in the year, while the S&P 500 is trying to make up for a 1 percent 2015 deficit.
“I’ve got a lot of coal. All I have is coal in my mailbox here. I think it’s been a tough year,” Lee told CNBC’s “Squawk Box.” “It’s tough for markets to look through [a] strong dollar, oil, and credit, because high yield’s been not behaving.”
“I’m actually impressed with the markets ending flat, given these issues,” he added.
Lee noted that flat markets are rarely followed by another year of zero gains. According to Fundstrat’s research, the median gain following a flat year is 11 percent. However, he cautioned that the double-digit change could be down.
The odds of a 10 percent or greater annual move in either direction following a flat year are 5 to 1, he said.
“We’re five times more likely to have a double-digit year than to have another year of coal,” he said.
Citi Chief U.S. Equity Strategist Tobias Levkovich told “Squawk Box” he found that assessment “statistically somewhat shaky,” noting that there are not many periods during which that phenomenon can be observed.
Citi’s sentiment measurements is generating a 96 percent probabliity of an up market in 2016, he said.
“We didn’t start 2015 with that kind of signal from our sentiment metrics, so that’s kind of giving us a lot of comfort,” he said.
While it’s hard to predict what will happen in 2016 based on 2015 potentially being flat, it is rare for the market to be flat or down two years in a row outside of a recession, said David Bianco, chief equity strategist at Deutsche Bank. The chances of the U.S. entering a recession are highly unlikely, he added.
U.S. markets need to avoid another profit recession in 2016 and see better sales and earning growth next year, he said. The S&P 500 can get close to 5 percent earnings growth next year, but with current oil prices, that target could be a stretch, he noted.
Crude prices have collapsed about two-thirds from their peak in the summer of 2014 to below $40, leading energy companies to slash spending. The S&P 500 energy sector is down 24 percent this year.
Bianco said he sees much of the risk of earnings disappointment next year in the energy and industrials.
About $45 per barral average oil prices would translate to a price-to-earnings ratio of 25 for the S&P energy sector, he said. Bianco added he wouldn’t want to pay more than 15 times earnings for energy stocks, which he believes would require crude prices to rebound to $60 per barrel.
“I think buying energy is making the assumption oil prices rally toward 60 within the next 12 months. Not unreasonable, but I don’t like the risk-reward,” he said.
[“source-businesstoday”]
