With a Federal Reserve rate hike decision, investors have to keep in mind what to think of the stock market heading into the rest of this summer and what to expect for the rest of 2017. Last Friday acted as a reminder that some of the market’s most popular stocks could face a serious bruising on no real news at all. The bad news is that those market darlings are mostly in the S&P 500 Index and in the Nasdaq 100. The good news is that most of them are not members of the Dow Jones Industrial Average (DJIA).
When 24/7 Wall Street gave its 2017 Bull-Bear Outlook, we came up with a peak DJIA level of 21,422. The Dow reached a level of less than 100 points of that target going into the Fed’s rate hike decision. A serious dilemma now exists for investors: Do you stick by the bullish convictions or do you lock in many of those gains? The bull market is now well over eight years old and the major stock market indexes are all up over 200% from the V-bottom lows of 2009. And for the past five years investors have found one reason or a series of reasons, differing each time, to line up and buy every single stock market sell-off. The Dow is up over 8% and the S&P 500 is up over 9% so far in 2017. Meanwhile, the Nasdaq 100 is up about 18% so far this year.
First and foremost, calling for any outright peak or bottom at any snapshot in time is an absolute sucker’s game. No one can ever really know the absolute levels that will change a market bias nor can they pick the exact moment of an extreme reading. This is not an exercise of calling an absolute peak in stocks in 2017.
Many analyst price targets that were in place in the key Dow stocks have risen by June from where they were on the last day of 2016. That would imply that the Dow could have even more room to run if analysts are correct, but investors need to consider that stocks simply cannot rise in a sharp line higher indefinitely. In fact, sharp rises to the extent we have witnessed in 2017 are generally followed by some painful corrections at some point.
Most strategists on Wall Street still have more of a bullish view for 2017 and 2018. Still, the top weighted stocks in the Dow are generally close to or above their consensus analyst target prices. With many positive readings in the market, there are also simultaneously some balancing issues and some negative influences. These are just some of the economic and broader issues to consider for the bull market in the summer of 2017:
- Earnings growth is still coming back, but economic readings are showing less robust growth than they were indicating earlier in the year.
- Inflation reached the Fed’s 2.0% to 2.5% target but has since slowed.
- The official strong payrolls gains from earlier in 2017 have tempered, but at least there are a record number of job openings, above the 6 million mark, now.
- Housing prices seem stretched, even as millennials are starting to become the next wave of home buyers.
- It is more than evident that the end of 2016 and first half of 2017 emulate a peak-auto theme, and banks have already started to trim their subprime lending activities.
- Despite interest rate hikes from the Federal Reserve, longer-term yields remain low and negative sovereign bond yields just showed their first gain in a year.
- Many of the pro-growth business initiatives have stalled or taken a back seat, and the political cooperation in Washington, D.C., is effectively at zero.
- There are still some serious doubts that gross domestic product growth will rise much more than the 2% line in 2017. Currency risks and international trade issues also remain threats.
With the S&P 500 valuation at about 18.0 to 18.5 times next year’s earnings estimates, what are investors to do?