It's Love: Stock Investors Mend a 9-Year Rift and Embrace the Bull

Updated on
  • TD Ameritrade clients boosted stock holdings for 11th month
  • Low interest rates support higher P/Es: San Francisco Fed

Ameriprise's Joy Sees Strong Fundamentals Driving Stocks

Nine days into 2018 and its first lesson for stock traders is clear: You shouldn’t have waited to see how the year would start.

“If you’re waiting for a pullback to get in, you probably are very frustrated,” said Jason Browne, chief investment officer at FundX Investment Group. “‘Don’t fight the tape’ has been king for a while.”

On Wall Street, where pundits spent a decade warning people not to get hurt in the market, the mantra has become don’t get left out. Stocks are surging and signs of receding skepticism are everywhere. Broker clients are adding stocks hand over fist. Price targets meant to last a year, last days.

“Otherwise patient investors have had to deploy capital,” said Frank Cappelleri, a senior equity trader at Instinet LLC. “Failing to do so puts them in an early performance discrepancy, a condition that was difficult to overcome last year.”

Optimism over Donald Trump’s tax program is pushing up profit estimates faster than any time in five years. Data on everything from manufacturing to employment and housing is breaking in the bull’s favor. Nobody seems to mind that the S&P 500 Index trades for around 23 times earnings. It was higher than that only about 1.5 percent of the time since 2003.

Retail clients at brokerage TD Ameritrade are among those shrugging off valuation concerns and loading up on shares. They boosted equity allocations in December for an 11th straight month, one of the longest buying streaks for retail investors the firm has ever recorded. That helped push TD Ameritrade’s Investor Movement Index, a measure that has tracked client positioning in the market since 2010, to a record for the second month in a row.

You can’t fault anyone for being long. The S&P 500 reached all-time highs 62 times last year only to jump the most in 13 months during the first week of 2018. It rose 2.6 percent to 2,743 last week, coming within half a percent of surpassing roughly a quarter of strategists’ price targets for the entire year.

Futures on the S&P 500 rose less than 0.1 percent to 2,747.75 at 6:51 a.m. in New York.

Animal spirits have supplanted fear in a market that hasn’t had a 5 percent correction since Britain’s secession vote. It’s getting reminiscent of the great stock market “melt-up” of the 1990s, or maybe a “blow-off top” characterized by extended readings in momentum indicators, said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence.

Fear of missing out has turned bears into bulls, but some of the S&P 500’s technical indicators are close to the levels that ring alarm bells. The index’s 30-day relative strength index on Monday jumped to 74, near the level last seen before the dot-com bubble, data compiled by Bloomberg show.

This doesn’t mean a decline in the S&P 500 is imminent -- momentum may fade well before the ultimate peak in the stock market, Adams said. But it’s making strategists nervous, for instance those at Societe Generale. SocGen forecasters led by Brigitte Richard-Hidden recommended last week to cut U.S. stock holdings to a minimum amid concern investors have already priced in most of the growth

“No one wants to buy the market when it’s low, they only want to buy it when it’s high,” said Donald Selkin, New York-based chief market strategist at Newbridge Securities Corp., which manages $2 billion. “It’s very easy to buy stocks when they are going up, so that’s why people are piling in.”

A 19 percent jump in U.S. equities last year pushed the S&P 500 to 23.1 times its current earnings, compared with 21.2 times for the MSCI All Country World Index. That’s nothing to freak out about, say staffers at the San Francisco Fed.

Low interest rates are one thing that support higher valuations for U.S. equities and may “warrant caution against bearish forecasts” on future stock returns, according to an economic letter by Thomas Mertens, Patrick Shultz and Michael Tubbs of the San Francisco Fed’s economic department. Low rates have been accompanied by reduced volatility in financial markets, driving up stock valuations.

“The overriding theme from our client questions is, ‘are we at maximum optimism?’” said Ed Clissold, chief U.S. strategist at Venice, Florida-based Ned Davis Research. “Better economic growth, tax cuts, and gradual Fed tightening are well known. The bears’ multi-year warning about valuations are, as well.”

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