Wall Street eyes 2018 gains with a side of caution

FILE PHOTO: Traders react at the closing bell on the floor of the NYSE in New York
FILE PHOTO: Traders react at the closing bell on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., November 30, 2017. REUTERS/Brendan McDermid/File Photo

December 30, 2017

By Sinead Carew

(Reuters) – U.S. stocks are expected to keep rising in 2018 because a massive drop in the corporate tax rate is seen boosting the economy and corporate profits, but strategists say sizable gains could either be short-lived or elusive.

The bull market is on track to mark its ninth birthday in March, with the S&P 500 climbing 20 percent for 2017 – its biggest increase since 2013. The drop in the corporate tax rate in 2018, to 21 percent from 35 percent, is seen by many as the biggest factor for the stock market next year.

Yet 2018 share gains are expected to be smaller than 2017 with the S&P 500’s price/earnings ratio – a measure of stock prices against expected profits – is around its highest level since June 2002. Many on Wall Street cite potential pitfalls even though they see no signs of a recession.

“We’ve had six years in a row where stocks have (outperformed) earnings, and I think we break that streak with stocks going up but not as much as earnings,” said Robert Doll, chief equity strategist at Nuveen Asset Management in Princeton, New Jersey.

Some say the tax bill’s benefit will be short lived. David Kelly, chief global strategist at J.P. Morgan Asset Management described the bill as “more carbs and less protein,” because the tax overhaul will improve spending but does nothing to boost productivity.

“It’ll be a one-year wonder,” said Kelly. “People should enjoy the party while it lasts but just make sure you know where your coat is.”

Several strategists cite the risk that faster economic growth could cause inflation to increase at a pace that would lead the U.S. Federal Reserve to raise interest rates faster than expected.

Wall Street’s rosy forecasts seem “well supported by the tremendous string of good news which the economy has delivered,” according to Jim Paulsen, chief investment strategist with Leuthold Group in Minneapolis.

But he said, the news is too good: “The problem with getting good news is that at some point you can’t be positively surprised any more.”

Paulsen does not expect a recession. But when the economic surprise index – which compares economic data to consensus expectations – is at high levels, equity performance tends to be weaker, according to Paulsen.

The Citi Economic Surprise index <.CESIUSD> was at 77 on Thursday, not far from its almost six-year high of 84.5 reached on Dec. 22.

“We’re going to have a 10-15 percent correction at some time in 2018. I wouldn’t be surprised if we’re down for the year,” Paulsen said. “If we get a correction and people get scared I’ll probably be buying again.”

Investors will keep a close watch on the on U.S. mid-term elections in 2018 because a Republican loss of control of the Senate or the House of Representatives could stall the party’s agenda. In 10 of the last 17 U.S. mid-term election years, equity price moves for the full year followed January’s direction, according to Jeff Hirsch, editor of the Stock Trader’s Almanac.

Investor moods in January may depend on whether the U.S. Congress reaches an agreement to raise the country’s debt ceiling. Investors will also be hoping Congress can reach a 2018 budget pact by Jan. 19. These are just some of the worries traders are contending with.

But the market has history against it. The S&P 500 rises on average 1.3 percent in the so-called Santa Clause rally – the period between Dec. 22 and Jan. 3 – according to Hirsch. This year, five days in, the S&P has risen just 0.1 percent.

“The failure of stocks to rally during this time tends to precede bear markets or times when stocks could be purchased at lower prices later in the year,” Hirsch wrote in a blog post.

(Reporting by Sinead Carew; Additional reporting by Caroline Valetkevitch and Rodrigo Campos; Editing by Leslie Adler)

  • notwar

    That guy is going to need a new hat.

  • nfcapitalist

    30,000 on the DOW… MAGA!!!

    • DCBlueBlood

      Under Obama there was a 186% Gain. Can Trump do that?

      Statistically speaking the Stock Market always does better under Dems.

      Even Trump Admitted that years ago.

      • youareok100

        Cry in your wheaties Snow Flake. The American economy is light years better under President Trump than Berry Obummer. You still have the panic attack of the Socialists not being in control. Gloom and doom is all you want you are so anti American

        • DCBlueBlood

          I’m not crying … Our IRA’s are kicking it! The last 8 years have been very good.

          I’m averaging 30% year over year. I used to be a Stock Broker.

          • youareok100

            Goodness. Then you are one of the evil rich people. You must be republican. Lol

  • Varangian Guard

    Negative feedback that comes from banks bailed out by previous administrations. It’s like taking marital advice from someone that has been divorced five times…..
    I don’t think anyone can determine exactly what will happen in the market and economy at this juncture. Accurate prognostications come from experience and since 2005 this economy and its changes are all new. Formal models don’t fit and placating society to keep voters has proven to be the wrong choice.
    Sound decisions both personally and politically is the responsibility of we the people. Vote your conscience and be thrifty. Sound advice for any economic season.

  • youareok100

    MAGA!! The rally is because America knows we have a true American leading us. The old Communist dictator has been gone a year. MAGA!!