Thoughts from our recent conversation with Piper Jaffray's Craig Johnson, which can be listened to this Saturday on the Newshour podcast page here or on iTunes here.
After a multi-year string of highly accurate calls on the market, Piper Jaffray's "Bullseye" Craig Johnson said "we have a little bit of wood to chop" for his year-end target of 2135 on the S&P 500 to play out (as of this writing the S&P 500 closed at 2005.55).
Stocks rallied strongly at the beginning of this week and even shot higher after the Fed's announcement to raise interest rates by a quarter point, only to reverse their gains and end mostly negative after Friday's close. Year-to-date the S&P 500 is now down 2.59%.
The S&P 500 would need to rally around 6.5% from current levels to reach Johnson's 2135 target—certainly not impossible, but looking less likely in the short weeks remaining.
Still Underweight Energy
Though many strategists are hoping we've seen a bottom in the energy sector, Johnson still advises being underweight.
“I think it is flat out too early,” he said. “The charts at this point in time say you have some support at around $32 to $33 for the West Texas Intermediate at, but … you have better support when you get down in the $20s. I would not be surprised to see a further drawdown in the oil price and I do not believe that is going to bring our economy to its knees.”
While we will see defaults and write-downs in energy, he said, he expects to see more consolidation in the space. We’ve been seeing a high correlation between oil prices and equities, Johnson said, but he doesn’t believe this correlation will be sustainable in the future.
Oil Prices Unlikely to Derail US Economy
Some of the strongest bull markets in history occurred with declining commodity prices, he noted. Also, in the 1990s, we had oil prices around $10 a barrel, and equity markets weren’t broken at that time either, he said.
It’s possible we’ll see a pullback in oil prices into the $20s in the coming months, Johnson added, but he doesn’t think declining oil prices will ultimately derail the US economy.
“The market needs to be worried about something, and right now it's high yield and oil prices,” he said. “I’d still be buying these dips … the secular bull market is still intact in our view.”
Treasuries
The yield curve has flattened and as the economy strengthens we’re going to see yields move higher, Johnson said. We could see wage growth occur, but what he wants to pay attention to in coming weeks is if the long end of the curve will rise, flatten or fall.
“I think that is going to be the ultimate verdict that all investors need to be watching,” he said.
He feels the equity bull market works until we see the 10-year bond yield reach 5%, which will take quite a bit of time to develop.
Listen to this full interview with esteemed market analyst Craig Johnson Saturday on the Newshour page here or on iTunes here. Subscribe to our weekly premium podcast by clicking here.
