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It will happen in 2018: Bank of America sees end of bull market

Dave SmartierNov 22, 20173 8051 vote +1 rating

Bank of America Merrill Lynch sees a scary good news-bad news scenario unfolding in 2018: A solid push higher in the first half followed by all sorts of potential trouble after.

The S&P 500 would peak out around 2,863 in the scenario, or about 11% higher than Monday’s close. Bond yields are expected to rise, with the benchmark 10-year Treasury note hitting 2.75% as global GDP growth reaches 3.8%.

© Author of the article: Jeff Cox.
© Source: CNBC

Bank of America sees end of bull marketThat setting assumes three things: the “last vestiges” of stimulus from the Fed and other central banks, the passage of tax reform in Congress, and “full investor capitulation into risk assets” on better-than-expected corporate earnings.

After that, though, things get considerably sketchier as the second-longest bull market in history runs into trouble.

Top of the commentators’ reaction:

Not being one to cry wolf, this had all the underpinnings of 2007-2008. I’m in real estate in NJ, the market seems to be at that same point as it was in 07, bidding wars on mid level homes, contract disputes, the potential of losing the real estate tax as a deduction had folks scared and not willing to buy. Republicans offering huge tax breaks to business so they can grow, meanwhile big biz i the us has trillions in cash, if they are not willing to invest in their companies, the tax break will simply add more cash to the trillions they are now hoarding, in the meantime, regular folks are getting ten bucks an hour for their jobs, not saving, not having anything to spend. The crash is coming, no doubt. But the rich get richer and the market zooms to new highs while regular Joe sits and worries if he can feed his family. Trump’s gift to America, his middle finger...

“We believe the air in risk assets is getting thinner and thinner, but the Big Top in price is still ahead of us,” Michael Hartnett, chief investment strategist at BofAML, said in a report for clients. “We will downgrade risk aggressively once we see excess positioning, profits and policy.”

Indicators that market positioning has gotten out of hand and signaling a fall would include active funds attracting more money than passive (there’s a $476 billion gap this year in favor of passive), and portfolio allocation for equities exceeding 63%, a level currently at 61%.

Top of the commentators’ reaction:

The, “Experts” keep quoting stock market history going back to 1929 endlessly and the history is not relevant here because of the continued low, low interest rates for almost a decade which we have never seen before. It looks to be like the, “New Normal”. Starved of returns from fixed deposits, people who would never touch a stock with a 10-ft. Pole are now up to their gills in stocks mainly the ones that pay good dividend. These folks have never seen a bear market and at the first sight of one will bail out, head first. They don’t belong in the stock market. Their selling will trigger mass dumping of stocks, one has to remember there is gigantic amount of money invested in ETFs, index funds. The Fed is behind the curve and at the speed they are going, a normal 10 yr treasury rate of 3-4% is only a dream. My prediction, we will have another 2009 like 40% market drop in the next 12-18 months!

Hartnett pointed out that the current bull will be the longest in history if it continues to Aug. 22, 2018, while the outperformance of stocks versus bonds, at seven years running, would be the longest streak since 1929.

The forecast is predicated on three core beliefs: The first is the aforementioned capitulation; the second an expectation of “peak positioning, profits and policy” that “will engender peak asset price returns” and a low in volatility; and, finally, an expectation that higher inflation and corporate debt along with tighter monetary policy will roil the corporate bond market, a critical prong of the risk asset rally.

“The game changer is wage inflation, which on our forecasts is likely to become more visible,” said Hartnett, who projects that salaries could rise 3.5% and push the consumer price index up 2.5% and convince the Fed that it’s close to meeting its 2% inflation goal.

Top of the commentators’ reaction:

Nothing lasts forever. My guess is GS and BAC are both kind of right with a good first half of the year followed by a tepid second half. What is undeniable we’ve been in a bull market since March/April 2009. Historically these runs don’t last more than 8-10 years. Another 10% move to the upside plus whatever gains we make in Dec are going to make stocks look pretty extended. While I wouldn’t sell until a decline starts rest assured one is coming in the next 12-18 months.

However, that cuts both ways: Should wage inflation again fail to materialize, Hartnett said “the era of excess liquidity” continues, bond yields would fall and the Nasdaq tech barometer would go “exponential.” That would signal a bubble that might not end until 2019, when a bear market would be triggered by “hostile Fed hiking, Occupy Silicon Valley and War on Inequality politics.”

“Big Top” trades favor technology, homebuilders, Japanese banks and the dollar against the Swiss franc.

BofAML’s forecast comes as Goldman Sachs released a price target of 2,850 for the S&P 500, after a comparatively bearish 2016 call for 2,400 that was passed 6 months ago.

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