The new year in asset markets began too rapidly both in the US and in the rest of the world. Banks and companies will have to revise their forecasts, as market movements are becoming more exponential, almost mocking analysts' forecasts.
The S & P500 took just one trading week to reach nearly 2,750 points, which was generally expected at the end of the year by about 25% of Wall Street analysts and strategists.
The Goldman Sachs goal is 2850 points, and the HSBC goal of 2650 points was reached before the start of the year.
Other analysts tried to change their forecasts to more “bullish” in the last days of last year.
But everything does not look so joyful. In the United States, where the corporate sector lives in anticipation of the tax reform and its results, positive changes in company earnings from the main index downplay the impact of tax cuts.
Bloomberg notes that in 2017, the S & P500 index completed the year more than 175 points above the most optimistic target, but a possible drop can even out even the most optimistic views.
Meanwhile, there are no signs of imminent collapse. This means that global investor euphoria has turned almost all global indices and assets into overbought markets.
Skeptics understand that there have never been such overbought levels, but the lack of sell signals makes them sleep poorly at night. Even the most notorious skeptics are forced to recognize universal growth, which, as it seems, will not end.
As a result, few are now warning about the consequences, and Wall Street is gradually forgetting its mantra of caution, less and less warning forgetful investors about the risks.
It is difficult to resist the temptation when the goals, which were to be fulfilled in a year, were completed in just a few days.
Trump's tax reform makes the world even more hostile to skeptics. It pushes profit estimates more than at any other time in the last 5 years. All statistics are now interpreted in favor of the markets.
And no one seems to mind that the S & P500 is trading about 23 times higher than profit. Since 2003, it was only overbought by the market in 1.5% of cases.
Fear of lost profits turned the bears into bulls, even if some of the technical indicators of the S & P500 are close to the levels when it is time to sound the alarm.
For example, on Monday the 30-day relative strength index jumped to 74. This is very close to the level that was recorded before the dot-com bubble collapsed.
Customers of investment companies also increase purchases regardless of warnings.
You can’t blame them: last year, the S & P500 reached record highs 62 times, and during the first week of 2018 reached a maximum of 13 months.
The desire to earn replaced all fears from the market, which did not fall by 5% since the UK voted to leave the EU.
This is reminiscent of a market decline in the 1990s, when everything happened against the backdrop of expanding dynamics.
Experts and analysts emphasize that psychologically no one wants to buy the market at the bottom, everyone wants to buy when it is high. And it’s very easy at these moments to buy stocks, seeing previous records, which is why people act this way.
Low interest rates are another factor that supports higher valuations for US stocks and may "deserve caution regarding bearish forecasts" regarding future returns. Low interest rates were accompanied by lower volatility in financial markets and higher stock prices.
Investors and customers of banks and companies do not want to see warnings. They see economic growth, tax cuts and a gradual tightening by the Fed. Who is interested in the forecasts of "bears" in this case? They will become relevant during the fall of the market, and then the nature of the fall will become avalanche-like.
Almost 4 years ago, Janet Yellen announced a “market foam,” but then S&P was 30% lower. Apparently, this didn’t scare anyone, and the Fed does nothing to stop the market mania.
How long this phase can last is completely unclear. But a recent Grantham study shows that the average time of the final phase of the “bubble” is 3.5 years, with acceleration for 21 months before the terminal stage.
But it’s absolutely certain that the higher the S & P500 level, the higher the likelihood that frustration will be painful.