Major bubble just burst, and that’s good for stocks: UBS

NYSE traders on the floor
Good times are just getting started: UBS   

A major bubble in the market just burst for the bears, according to one Wall Street strategist.

On CNBC's "Fast Money" Wednesday, UBS' Julian Emanuel said that better-than-expected U.S. data and a stable Chinese yuan has led to a popping of the global "negativity bubble," and that could drive equities significantly higher in March.

"Essentially, people were defensively positioned coming in to 2016," explained Emanuel, who serves as executive director for U.S. equity and derivatives strategy at UBS. "Then, all of a sudden, the numbers started to get a little bit better."

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Positive U.S. data includes January overall retail sales, which rose 0.2 percent, while GDP in the fourth quarter of 2015 grew at an annualized rate of 1 percent. Additionally, the U.S. dollar hit a new one-month high on Tuesday.

Emanuel also cited jobs data as evidence that the U.S. will not head into recession. Despite slight rises in February, U.S. initial jobless claims remain near cycle lows at 272,000 while unemployment is at 4.9 percent, the lowest level since 2008. While UBS contends that a spike to 350,000 jobless claims would trigger alarm bells, the firm says that no such spike seems to be in sight. Historically, spikes have occurred during recessions dating back to 1991, 2001 and 2009.


Emanuel also cited the Supply Management Manufacturing PMI, which is below 60 but still holding well above 45, otherwise known as "the danger zone."

"That data doesn't show expansion, but it's just a little bit better than what we're expecting. [From there] you get an outsized market reaction to the upside," said Emanuel.

And, despite depressed sentiment, tightening financial conditions, a shaky political backdrop and elevated volatility in assets and earnings, the firm still believes that markets are poised for gains and "remains comfortable" with an S&P 500 2016 year-end price target of 2,175, which is among the most bullish on Wall Street. That's a nearly 10 percent rise from the current price of around 1,986.

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"A turn has happened in February where assets from the Mexican peso to unleaded gas to retail stocks in the S&P all turned together," said Emanuel. He noted that, overall, the investor mentality has changed and, with small pieces of good news, that the rally will carry on regardless of concerns over instability.

He therefore expects the Fed to remain on course for additional rate hikes in 2016. In order for volume in the markets to pick up, Emanuel feels interest rates need to move higher, and is therefore encouraged at the prospect of more icnreases.

"We're only looking for two [rate hikes], in September and December," said Emanuel. "The Fed is not going to [raise] until it feels good and ready to go."