As the Federal Reserve Banks continues to taper its monetary stimulus and as it gets new leadership, one noted market analyst says it's almost inevitable that stocks will drop over the next few months.
Gina Martin Adams, Senior Equity Strategist at Wells Fargo Securities, already has one of the lowest year-end estimates on the market benchmark S&P 500 index – 1,850, or about 4% from where it trades now. That's a paltry compared to last year's 29% return.
"It's going to be a relatively volatile year most likely," says Martin Adams, "considering the shift in Fed policy which seems to be underlying a lot of this volatility. Why are emerging markets currencies breaking down? Some would argue that a lot of this is because their debt prices are so sensitive to what happens at the Fed. So, I think a lot of this is volatility affiliated with the typical market reaction to the Fed changing its tune."
Even with her expectations of corporate earnings growing at 7% in 2014, Martin Adams still sees increased stock volatility ahead due to what's going on with changes in policy and management at the Federal Reserve.
"My biggest concern is that it all starts with the Fed; it all ends with the Fed," says Martin Adams. "Valuations expanded so much last year in anticipation of better earnings growth and in combination with very, very easy Fed policy. If Fed policy starts to reverse, that could very easily increase volatility substantially and really compress the multiple."
After the taper is done, Martin Adams believes the Fed will start raising rates next year. And that's not going to be easy, she believes.
"There's likely to be a few stumbles along the way," says Martin Adams. "I'm hopeful they can manage the process and equities can come out relatively stable. But, the big risk is the Fed may stumble a little bit more and that could create a lot more volatility in the equity market."
(See: CNBC's Fed coverage)
As if trying to get out smoothly of the Fed's now-$65 billion monthly bond-buying stimulus isn't enough trouble, Martin Adams also thinks that the transition of the Fed Chairman's job from Ben Bernanke to Janet Yellen will likely lead to a fall in stock prices over the coming months.
"It's almost typical that in the first months of a new chairman, the markets suffer," says Martin Adams. "The next few months could be relatively difficult for stocks."
"I think that investors are happy to kind of sit on their hands," Martin Adams says, "maybe take some profits on last year's gains, wait out the economic data, and wait out our understanding of how this Fed's going to operate. "
To see the rest of Gina Martin Adams discussion on what's next for stocks given the change at the Fed in both policy and leadership, watch the video above.
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