Saturday, September 26th, 2020

How Will the Rally End in 2018?


All good things come to an end that that includes the current stock market rally. But when and how will the rally end? CNBC quotes Bank of America saying that the end of the bull market will be in 2018.

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 percent higher than Monday’s close. Bond yields are expected to rise, with the benchmark 10-year Treasury note hitting 2.75 percent as global GDP growth reaches 3.8 percent.

That 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.

Those who have invested in and stayed in so-called risk assets based on earnings have done well the last few years despite such assets being overpriced on a long term basis. What always happens at the end of rally is that investors who have avoided risk assets finally give in or capitulate and put their money in risky stocks and other investments just as the original investors start to exit driving prices down.

These folks see wage inflation taking hold in 2018 and the Fed raising interest rates. Higher rates and the Fed reducing its bond portfolio will slow the economy. With more and more money in overpriced stocks the odds of a substantial correction in late 2018 will only increase.

Will China Be the Trigger?

Our sister site, Profitable Investing, wrote about what happens when the Chinese market implodes.

The decades-long Chinese economic expansion was based on borrowing to build manufacturing and export capacity and has left the China with a huge amount of private and public debt. The situation in China is reminiscent of that in Japan in the late 1980s when their economy seems all set to take over the world and then hidden debts stifled growth and sent them into a quarter century of deflation. Thus the Chinese economy may be in for a reset or may implode leaving things in shambles for years if not decades. Our concern is when the Chinese market implodes what happens to your investments?

The world economy is a very interconnected thing and when one large economy takes a hit the effects follow the sun and take down markets moving East to West across the globe. How the rally will end in 2018 may start with an economic implosion in China and not an event or events in the USA.

It’s the Economy, Stupid

These were the famous words of then candidate Bill Clinton running for the presidency that he won from the first George Bush in 1992. The economy is also what drives stock prices and if tax cuts drive debt up that is a bad thing for stocks. Likewise wage inflation could cause the Fed to raise interest rates which could also be the trigger for a correction or crash.

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