John Melloy, CNBC Fast Money
Market analyst Elaine Garzarelli, who hedged her portfolio before the ‘Black Monday’ crash in 1987, sees a long-lasting bull market that could lift the S&P 500 more than 25 percent as the Federal Reserve’s second round of accommodative monetary policy takes effect.
Lessons from Japan’s Quantitative Easing
“Japan’s Nikkei rose 50 and 80 percent after quantitative easings in 2003 and 2004,” said Garzarelli, who runs New York-based Garzarelli Capital, in a note to clients. “The Fed’s QE2 money will circulate through the system and create velocity better than the cash used for QE1. We expect faster economic growth, which should keep stocks and commodities performing well.”
Garzarelli points out that because the Fed is buying very liquid assets ($600 Billion in Treasuries) instead of illiquid bank assets that sat idle during QE1, money will flow more easily through the economy, boosting activity.
Garzarelli’s Track Record and Wall Street Reputation
Garzarelli is best known for exiting before the Dow’s 20 percent plunge on Oct. 19, 1987. Her predictions since then remain well regarded and widely followed. Over her career, she was named top Quantitative Strategist for 11 consecutive years in Institutional Investor’s annual survey.
Impact of QE2 on Stocks and the Economy
“Lower Treasury rates push stock prices higher, which increases consumer net worth and spending,” writes Garzarelli on QE2’s effects. “Declining rates also affect the dollar: export growth accelerates, and multinational EPS expands.”
The S&P 500 is up 20 percent from its 2010 low in July as investors anticipated another round of quantitative easing. Stocks rose Wednesday after the yield on the 30-year Treasury fell.
Other Factors Supporting Bullishness
Beyond Japan’s QE comparison, Garzarelli cites strong holiday sales, rising industrial production, and the Obama tax deal as factors driving her bullish view.
Recommended ETFs
“Our indicators signal a long-term bull market,” said Garzarelli, who recommended the Consumer Discretionary SPDR [XLY], Financial Select SPDR [XLF], Industrial SPDR [XLI], Materials SPDR [XLB], and Technology SPDR [XLK].
Valuation Analysis
Her valuation calculation is compelling. With low yields on Baa-rated bonds due to QE2, the S&P 500’s fair value P/E ratio should be about 17 times earnings. Using her EPS estimate of $90 gives a fair value of 1530, nearly 25 percent higher from current levels.
Industry Endorsements
“Elaine is a brilliant strategist, and her multifactor model is very bullish,” said Anthony Scaramucci, managing partner of SkyBridge Capital. “The Fed’s policy success depends only on their willingness to act aggressively.”
Potential Risks of Quantitative Easing
Garzarelli, famous for avoiding major market crashes, warns of complications in unwinding QE later.
“When Japan withdrew QE, the Nikkei fell from 18,262 back to 8,000.”
Originally published on CNBC.com Fast Money
