The Daily Prophet: Stock Traders Find Comfort in Muted Outlook

Connecting the dots in global markets.

The S&P 500 Index closed at another record high Monday, its third straight day of gains. Although that's the longest such rally since the start of November, more surprising is that it came two days before the U.S. Federal Reserve is widely expected to raise interest rates again while reaffirming its outlook for three more next year.

Chalk it up to holiday spirits and the fact that the big Wall Street firms seem to be tripping over one another in calling for even more gains in 2018 after this year's impressive 18.7 percent advance. But perhaps investors wouldn't be so cheery if they looked at the outlook for stocks from the widest possible lens. That's what FactSet did. The firm took every sell-side analyst’s 12-month price target for all members of the S&P 500 and mashed them together to get what DataTrek Research calls a sort of "crowd-sourced prediction" for where the index will trade a year from now. The result: a 3.7 percent advance from Friday's close, which is a more muted gain than the 6.5 percent forecast that's based on the median estimate of strategists surveyed by Bloomberg. DataTrek notes that even though they were way off in 2017, with the analyst-imputed price target at the start of the year being 7 percent below the S&P 500's current level, the analysts have a pretty good track record, generating a margin of error of just 3.1 percent if you discard the outlier years of 2002 and 2008.

Plus, when you add in a 2 percent dividend yield, the projected return rises to 5.7 percent, according to DataTrek. "Given lofty valuations at the moment, that seems reasonable," Nicholas Colas, co-founder of DataTrek, wrote in a research note Monday. "I think if you offered an assured 5.5 – 6.0 percent return to holders of U.S. equities after an (up) 18 percent year and with U.S. stocks trading at (greater than) 18 (times) earnings, many would grab it with both hands."

Bitcoin futures started trading Sunday, and as TF Global Markets Chief Market Analyst Naeem Aslam put it, "In the recent history, there hasn’t been any derivative which gained more attention on the global platform as Bitcoin." That may be true, but all the attention failed to translate into very much activity -- at least initially. According to Bloomberg News's Elena Popina, from 6 p.m. Sunday to 9:30 a.m. today in New York, 2,923 contracts changed hands in a total of 2,494 trades, representing an overall value of $50.2 million. By way of comparison, about $4.9 billion of copper futures moved over that span, while $3.6 billion of front-month Nasdaq 100 futures did, data compiled by Bloomberg show. Bitcoin futures more closely resembled stock market trading in Discovery Communications, the fourth-smallest company in the S&P 500. About $60 million of its shares traded in the first three hours Monday. “The bitcoin’s super-high volatility is not for everyone’s taste,” Randy Frederick, vice president of trading and derivatives with Charles Schwab & Co., told Bloomberg News. “Part of this is the awareness issue. You’ll be surprised to know that a big number of people that follow bitcoin don’t know about the launch of the futures trading.” Cboe Global Markets’ new contracts were priced as much as 13 percent higher than bitcoin itself since trading began Sunday night, according to data compiled by Bloomberg. That should have arbitrage traders salivating, especially among market makers starving after their -- already successful and hugely profitable -- efforts to make other similar assets trade in lockstep, Annie Massa and Sonali Basak of Bloomberg News report.

Norway is Western Europe's biggest producer of petroleum, so it would seem logical the krone would be on the rise with Brent crude oil was solidly above $60 a barrel and OPEC agreeing to extend its production cuts. But logic is hardly a reason to make bets in markets. Despite the run-up in oil prices, the krone has fallen 5 percent since the end of August against a basket of major currencies based on Bloomberg Correlation-Weighted Indexes. Norway's currency was the worst performer Monday, falling almost 1 percent after a report showed a slowdown in inflation. That could make it less likely that Norway's central bank raises interest rates. At about 17.3 percent, the foreign-exchange strategist at Brown Brothers Harriman note that the Norwegian krone is the most overvalued currency after the Swiss franc, based on Organization for Economic Cooperation and Development data. Policy makers are likely to look through a recent deceleration in consumer price inflation, according to Bloomberg News's Love Liman. A range of banks, including Nordea Bank AB, SEB AB and Danske Bank A/S, expect Norway’s central bank to bring forward a first interest-rate increase in its new forecasts this week. They held on to that view despite data on Monday showing headline inflation slowed to 1.1 percent in November, the lowest in four years and far off policy makers’ 2.5 percent target.

The market for raw materials is one place on Wall Street where what's good for consumers is usually bad for investors, and vice versa. For example, booming supplies in everything from coffee to wheat have dragged prices lower. But lower prices have dragged the Bloomberg Agriculture Subindex to its lowest level in data going back to 1991 and continuing a slide that has lasted since early 2014. It's always a mistake for bulls to say "It can't go any lower," but that mentality is what appears to be driving investors, who have increased their bets on a price rally by more than 10-fold just before the index reached its low, according to Bloomberg News's Marvin G. Perez and Jeff Wilson. In the week ended Dec. 5, combined net-long positions held by funds across 11 agricultural products totaled 90,536 futures and options, according to U.S. Commodity Futures Trading Commission data published Friday. The holding, which measures the difference between bets on a price decline and wagers on a rise, compares with 8,569 in the prior week. The 11 products tracked are: cocoa, corn, cotton, coffee, cattle, hogs, sugar, soybeans, soy meal, soy oil and wheat. One thing the bullish investors might not have seen coming: an extended decline for Brazil’s real, which capped a second straight week of losses. The country is a commodity powerhouse and is the No. 1 exporter of sugar, coffee, soybeans and orange juice. A drop in its currency increases the appeal of shipments that fetch dollars in return.

By most measures, the U.S. economy is on solid ground. But there's an awkward reality to the strong façade: there's isn't much corporate loan growth to speak of. Fed data released late Friday showed that the amount of commercial and industrial loans outstanding fell for the third straight week. At $2.117 trillion, the amount of loans at banks is down from the high this year of $2.129 trillion in September. That decline could very well be caused by companies holding off on their borrowing until they get more clarity on the Republican tax plan, but even so loan growth has been very sluggish this year, rising less than 1 percent. That compares with 7.31 percent in 2016 and marks the slowest pace of growth since a decline of 5.75 percent in 2010. The Fed's latest quarterly senior loan officer survey, released last month, found that banks have generally loosened their commercial and industrial loan standards, which makes the latest slowdown all the more worrisome since it suggests there's not a lot of demand for the debt. U.S. companies expect their investment and hiring to grow at a slower pace in 2018, and only a small share say proposed tax legislation is driving their capital-spending decisions, according to the Institute for Supply Management’s semi-annual forecast. Factory purchasing managers see capital spending rising 2.7 percent in 2018, slower than the 8.7 percent gain reported for this year. Their counterparts at service providers project investment growth of 3.8 percent, also weaker than this year’s 7 percent advance.

Tuesday brings the latest reading on the NFIB's Small Business Optimism Index. Despite the gauge generally trending lower this year, to 103.8 for October from 105.9 in January, it remains well above the 94.9 level in October before President Donald Trump was elected. Optimism among small businesses has been high amid a tighter labor market, the prospect of tax cuts and efforts by the Trump administration to reduce regulatory burdens. The median estimate of economists surveyed by Bloomberg is for a reading of 104 for November. Optimism among small businesses is a big key for the economy, since they are the biggest employers. One piece of data out Monday suggests the risk going forward is that optimism eases, with the Labor Department saying that U.S. job openings unexpectedly cooled in October from an all-time high a month earlier. The number of positions waiting to be filled fell by 181,000 that month to 6 million.

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Markets Risk Overvaluing Profit Repatriation: A. Gary Shilling

The Fed Is Likely to Stand By Its Outlook for 2018: Tim Duy

A Year of Double-Digit Gains Is the Norm for Stocks: Ben Carlson

Four Developments to Watch in World Economy: Mohamed A. El-Erian

Bitcoin Futures Aren't a Hit, and That's Good: Leonid Bershidsky

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