There has not been a bear market in the past 25 years without a recession and the economy is simply too strong now whether it is jobs, housing or confidence, he noted.
A bear market not necessarily means a 20 percent slump; the index may just stagnate and refuse to move up. Asked if that could be a possibility, Julian answered in affirmative.
However, UBS believes markets have been experiencing a bottoming process over the last few weeks and the elevated volatility is likely to continue which investors need to learn to live with. Markets may witness wild oscillations between daily openings and closings, but investors need to stay patient, he observed.
For the broad indexes to go up there needs to be sustained buying pressure. Asked where the buyers are going to come from, Julian said investors this year were largely buying into Europe and Asia and global portfolio managers were underweight the US.
UBS thinks there’s still a lot of catch up play left in the market, although a lot of investors have already sold their overseas holdings and bought US equities. There’s an element to the ongoing bottoming process where people are waiting for the conditions to get better and the money will come in once the bottom is found.
There’s a pronounced tendency for the fourth quarters to be good because people look ahead to the next year where UBS sees an earnings recovery that’s going to drive equities, he explained.
Asked what could potentially change UBS’ outlook for the markets, Julian said deterioration of US economic conditions or an exogenous event could dampen sentiments, though UBS doesn’t foresee any such possibility soon, he concluded.
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