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Inside the Market

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Correction? Probably. But also expect a nice rebound Add to ...

Crisis in Europe? A stalled U.S. economic recovery? Tell that to Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America, who raised her year-end target for the S&P 500 on Monday – to 1,450 from 1,400 previously.

“In 2010 and 2011, the S&P 500 saw solid mid-to-high single digit gains in the first four months of the year followed by 14-19 per cent corrections, and both years ended with double-digit rallies,” she said in a note. “So far this year, the market has followed a similar pattern and this has some investors wondering whether we are in for yet another sequel.”

She believes we are, and relies on the bullish signals from a number proprietary models as reasons to believe that the bull market will persevere, even as economic uncertainty threatens to weigh on stocks in the short-term.

Indeed, Ms. Subramanian believes that the likelihood of another stock market correction – defined as a dip of 10 per cent or more – remains “elevated” due to the situation in Europe and a cautious view on U.S. economic growth. But the damage should be limited to a downside of 1150 for the S&P 500.

Any correction would be tempered by the fact that market sentiment is already quite low, cash levels are high, April had the biggest equity outflows in 16 years and market valuation is compelling.

“Current levels of sentiment and valuation suggest that investors are likely to earn healthy equity returns in the long term,” she said. “Long-term investors can take advantage of this by extending their time horizons and using pullbacks and corrections as opportunities to build equity positions rather than decrease them.”

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