Oct. 14 (Bloomberg) -- U.S. stocks may rally to their highest level this year as investors become more bullish amid optimism there won’t be a second Lehman-type event, according to Michael Gayed, chief investment strategist at Pension Partners LLC in New York, predicting what he calls a “fall melt-up.”
“The markets have behaved as if a second Lehman-type event already occurred, based on how sectors and bonds have outperformed,” Gayed said in a phone interview, referring to the bankruptcy of Lehman Brothers Holdings Inc. in 2008. Pensions Partners manages $140 million. “Only that event never happened -- it was just priced in. It isn’t about what has happened, but about what hasn’t happened.”
The Standard & Poor’s 500 Index has rallied 9.5 percent since it came within 1 percent of entering a bear market on Oct. 3. The benchmark measure rebounded amid speculation that European leaders are nearing a plan to tame their sovereign debt crisis and after the Federal Reserve said it discussed further asset purchases to boost the economy.
“Markets may be realizing that it won’t be as extreme a scenario as everyone thought during the summer,” Gayed said. “There will likely be a strong move up as investors turn more bullish. I wouldn’t be surprised to see the stock market making new highs by December and acting as if this whole summer crash never even happened.”
The benchmark measure for American equities sank 7.2 percent in September, its biggest monthly slump since May 2010, as euro-area leaders struggled to contain the region’s sovereign debt crisis and concern mounted that the global economic recovery is stalling.
Drugmakers, Utilities Underperform
While the S&P 500 has rallied 6.4 percent since Sept. 30, a gauge of U.S. health-care companies has risen 2.6 percent and a measure of utility shares was little changed. Health-care and power companies outperformed in August, when they lost 2.4 percent and gained 1.7 percent, respectively, while the S&P 500 slumped 5.7 percent.
Gayed, who predicted in June that the market would post “a significant decline,” said that the underperformance in defensive sectors this month compared with the main market indicated that the S&P 500 will rebound.
“It is possible that we have been in a stealth bear market since February, in which case the August crash may have marked the end of it,” Gayed said.
Gayed said he has changed his positions, investing in equities and moving away from bonds. He predicted that financial shares will outperform.
A gauge of U.S. banks has retreated to 10.2 times the estimated earnings of its constituent companies earnings, according to data compiled by Bloomberg.
“Banks have taken such a big beating,” Gayed said. “They may be huge bargains at these levels given that they have reacted to an event that has not occurred. That means that the magnitude of the declines in bank shares in the absence of a Lehman-type event is ultimately irrational.”
--Editors: Will Hadfield, Andrew Rummer
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