The recent rally in stocks is “a sham recovery,” according to chief investment officer Peter Tuogood. The chief information officer of UK-based financial services firm Embark Group said he now expects a decline in US stocks, after the S&P 500 rose 14% since the beginning of October. Toogood said he worries about valuations given that US stocks tend to trade at a P/E (price-to-earnings) multiple of 20, but yield an average of 5% annually. This compares with European equities that are yielding 8% or 9% on a P/E of 10x or 11x, he said. The .SPX 1Y Line “This will likely be a resurgence for a while, and that’s my best guess,” Toogood said. “You’ve got a nice little bear market bounce in the US” Toogood also warned that the S&P 500 could see significant declines in the near term. “It’s probably around 3200-3300,” he said. That’s down nearly 20% from Friday’s close of 4045. The CIO said it was bearish on US stocks because interest earned on liquidity has risen above bond yields in recent weeks. The federal funds effective rate was 4.57% on March 1 — higher than yields on 5-year bonds. However, the risk premium for investing in stocks has not risen along with it, according to Toogood. This means that stocks will either have to become cheaper to compensate for the increased risk, or risk premiums (and bond yields) will have to fall to maintain current stock prices. Bond prices – and their yields – partly reflect expectations about the rate of inflation. Toogood said concerns about inflation may continue to weigh on the market because supply chain disruptions have not been fully resolved. “You have full employment…in other words, inflation is holding steady,” Twogood told CNBC’s “Squawk Box Europe.” Consumer prices are down from their highs but they’re still high, and strategists say we have “a way to go.” Meanwhile, logistics managers warn of a continuing source of inflation in the supply chain due to an imbalance between supply and demand in warehouses. “I don’t think supply chains have particularly arranged themselves and the services sector is definitely suffering from supply problems,” Toogood added.
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