After Goldman, DB Warns About S&P 500: Play Alternative ETFs

The S&P 500 may witness an astounding run this month, but that may not be enough to prove its resilience to a group of analysts. Because after Goldman, Deutsche Bank (DE:DBKGn) gave a bearish outlook on the forward run of the key U.S. equity index.

In a recent note, Deutsche Bank's David Bianco indicated that “the next move for the S&P 500 is a 5% to 9% decline ahead of the election.” Though the U.S. economy is taking root lately, the momentum is still sluggish. The ongoing earnings recession may pose a threat to the upbeat market outlook.

So, investors seem over-excited about the S&P 500’s immediate prospects but are “also complacent about long-term yields” as per the bank. It believes that in spite of the present bullishness, it’s best to be patient with equity investments.

In any case, the May–September period is seasonally weak for the S&P 500 which is one of the reasons for Deutsche Bank’s moderate outlook over the S&P 500. The analyst revealed that "out of recessions, average S&P May–Sep gain is 0.8% and -0.9% in election years vs. the 5.3% gain since April end this year.”

Having said all, Deutsche Bank expects the index’s year-end rally to close at 2,150. If this holds true, this means a 0.9% decline in the S&P 500 for this year from 2,168.48 as of July 25, 2016. The index rose about 8.4% in the last one month (as of July 25, 2016).

Inside Goldman’s Take

Even Goldman Sachs (NYSE:GS) is not bullish on the S&P 500. The research house recently expected the S&P 500 to slide as much as a 10% this year. Its recent view on stocks is neutral on both the three- and 12-month frames. In fact, the Fed already pointed to the overvaluation in U.S. stocks.

P/E Expansion Too High to Remain Stable?

Goldman’s chief equity strategist David Kostin indicated that “since September 2011, S&P 500 forward P/E has grown by 75% (from 10x to 18x)”. This gigantic expansion rate was breached only twice since 1976, one in the 1984–1987 period when P/E increased 111% and then in the 1994–1999 timeframe when P/E skyrocketed 115%.

But both times, the rally ended in massive crashes. The first instance was the Black Monday collapse and the second was the tech bubble burst. So, the analyst finds it difficult for the S&P 500 to continue with its stellar show in the current investing backdrop (read: ETF Strategies for 2H).

ETFs to Gain from This Warning

If you are a believer and follower of Deutsche Bank and Goldman, you can play this warning by shorting the S&P 500 and investing in inverse ETFs like Short S&P500 ETF (TO:SH) and Direxion Daily S&P 500 Bear 1x Shares ETF SPDN. But investors may not need to take such extreme routes and just park their money in defensive ETFs to benefit out of this situation (read: Beat Brexit-Induced Sell-Off via These Inverse ETFs).

WeatherStorm Forensic Accounting Long-Short ETF (DE:FLAG)

The underlying index of the fund seeks to allocate capital to higher quality stocks at lucrative valuations while shorting poor quality stocks offering a less compelling valuation.

Reality Shares Divcon Dividend Defender ETF DFND

The fund invests 75% of its portfolio in large-cap U.S. companies with the highest probability of raising their dividends within a year, based on their DIVCON dividend health scores.

X-Links Long/Short Equity ETN CSLS

The index is designed to correlate to the historical performance of the Credit Suisse (SIX:CSGN) Long/Short Equity Hedge Fund Index. It gives exposure to a long/short equity strategy as indicated by long and short positions in various market measures.

Reality Shares DIVS ETF DIVY

This ETF is active and does not track a benchmark. It looks to deliver long-term capital gains on the basis of “growth of dividends, not stock price, of large cap companies” (read: SEC's New Rule May Boost Active ETFs).