Any way you slice it, the rally off the 2009 lows has been stunning. It is similar to the kind of rally we saw during the 1990s in terms of gains and length, but like all good things, it will come to an end. While none of the firms we cover on Wall Street are calling for a crash, as that is typically not good for business, few are hyper-bullish, and with good reason. The long market rally, which was partially fueled by extraordinary low rates, is destined to end at some point, and perhaps sooner rather than later.
A new research report from Stifel’s Bruce Bannister and his outstanding team makes the case that the next year still has some positive tailwinds, but they also feel that starting in the middle of 2018, some strong headwinds could be headed our way. They listed six positives for the next year, and six negatives for the following year.
Here are the positives the Stifel team sees for the rest of 2017 and the first half of 2018.
- The current and coming higher price-to-earnings multiples are common in a period of deflation to reflation. In addition, although the yield curve has flattened, they feel it is fine and does not represent a top.
- The federal funds rate, which currently stands right near 1%, is below bear market and recession-inducing levels. They also feel that labor costs stay in check in 2017.
- S&P 500 earnings per share revisions are improving. The Stifel target for the S&P 500 is $125, while the consensus is slightly higher at $130. That is versus estimates of $106 for 2016.
- They expect the 10-year Treasury yield to rise to 3%, versus the current 2.29%, with a slightly stronger dollar into early next year. Both are signs of reflation.
- The analysts see more global growth with an industrial production recovery the rest of 2017.
- They also see oil rising to $60 a barrel over the next year, which is reflationary.
Here are the negatives that Stifel sees for the period that includes the second half of 2018 and into 2019.
- Fiscal stimulus, like the infrastructure build-out the president has proposed, is good for Main Street but bad for Wall Street, as the Federal Reserve could ratchet up rates in a faster exit from its monetary stimulus.
- The Stifel models show that this is the final run for an aging and tired bull market to the 2,500 or so level on the S&P 500. Then they see a trading range to the mid-2020s.
- Peaking S&P 500 earnings per share growth eventually will slow stock price gains. The S&P 500 peaks with the 10-year Treasury yield in 2018.
- OPEC’s free-ride for U.S. shale may fade late next year, which could drive prices down with a war for market share.
- The political risk surrounding U.S. trade policy and actions are more likely in 2018 than 2017.
- Brexit and a possible Italian exit from the European Union risk may rise in 2018 to 2019 as talks become more tense between Brussels and the countries combined with the European Central Bank taper. Some feel the potential for a French exit is also possible.
Toss in the fact that the gigantic baby boomer retirement tidal wave has long since started and continues to loom, and many may be selling stocks to move to fixed income or other income vehicles. The good news here is that investors may have a long runway to prepare for the next secular market move, which barring a huge geopolitical meltdown, may be sideways trading for years to level out the years of double-digit gains.