3.000 or Bust

A cura di Walter Snyder
The S & P 500 (SPY) has topped the record January 2018 high and currently stands at 2,904. With US companies planning share buy-back programmes amounting to US $ one trillion within a year, it is extremely likely to go over 3,000 before the end of 2019. The Fed will probably hike the basic interest rate to 2.00/2.25 % in September with another hike in December. This is unlikely to dampen spirits on Wall Street.
With inflation about 2% with a tendency towards rising, the Fed will most likely pursue its course towards normalization of interest rates. Barring any unforeseen circumstances, the QT programme should also proceed apace at least until untoward occurrences lead Mr Powell to rethink his strategy.
The optimism in the Bull market could be tempered by trade wars and the imposition of high tariffs on wide swathes of goods. That could increase inflation considerably and convince the Fed that further rate hikes are necessary. In that case the Fed could set off a recession as it has done in the past.
Another potentially negative factor is the flattening yield curve with only 21 bps between the two-year and ten-year notes. It would not take much to prod the Fed into raising interest rates more to reach a point where the yield curve would invert.  An inverted yield curve has proven to be a harbinger of recession occurring about one to one and a half years later.
Given these premises it would be reasonable to reckon that the current Bull market still has some time to run in 2018 and even into H1 of 2019.  One problem with investing in equities at the present time is the fact that valuations are high and that future returns are most likely not going to equal what investors have reaped since 2016. Some stocks have ridiculously high P/E ratios, and one can really wonder how Amazon with a P/E ratio of 156.12 is going to be able to maintain its momentum. The Nasdaq 2020 estimate of 47.3 is not particularly reassuring since Amazon profits from retail sales are not exhilarating.
Even so, “animal spirits” have had the better of value investors and sponsors of the Doom and Gloom Club will be suffering from FOMO (Fear Of Missing Out). Since the current rally is now the longest on record, those who believe in market cycles or credit cycles will be taking precautionary measures just like the executives that have sold over ten billion dollars of stocks in the last few weeks. Are they cashing in and getting out while the exits are still clear?

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