January 25, 2018

Looking for the Equity Market Top

by Tajinder Dhillon.

Equity markets around the globe are off to a flying start in 2018 with all major indices on the plus side and many at all-time highs. When comparing this year’s start vs. 2017, most indicators have either achieved the same performance YTD or have significantly outperformed, as noted below.

Exhibit 1: 2018 YTD Performance vs. 2017 
2017 YTD 2018 YTD
S&P 500 1.27% 6.28%
Dow Jones Industrial 0.29% 6.13%
STOXX 50 -0.44% 4.87%
FTSE MIB 0.73% 9.38%
IBEX 35 -0.16% 5.86%
OMX 30 -0.83% 4.23%
Nikkei 225 -1.17% 5.97%
Shanghai CSI 300 1.63% 8.73%
S&P BSE Sensex 1.86% 6.13%
Note 1: Returns are calculated using Total Return (i.e. Dividends Reinvested).
Note 2: Time period for calculation: Dec 31 – Jan 23.

Source: Thomson Reuters Eikon/Datastream

How long will the bull gallop?

Equities have experienced a “Goldilocks” environment (not too hot, not too cold) for many years – uninterrupted growth with muted volatility. However, this situation also has investors concerned about the sustainability of the bull run.

Fueling the current run, it has been stated by many investment banks that they are expecting the S&P 500, now at about 2,800, to pass another milestone this year, breaking the 3,000 mark.  Strong earnings growth coupled with U.S. tax reform is expected to provide a buoyant environment. Analysts polled by Thomson Reuters (I/B/E/S) imply an S&P 500 Q4 forecasted growth rate of 12.4% (which is updated daily via our S&P 500 Earnings Scorecard).

However bullish markets are at the moment, investors will be cautious as they navigate unchartered territories. Exhibit 2 highlights a cross-asset view of benchmarks near their all-time high.  It is remarkable to see that the top 16 indices are all equity benchmarks, where eight are at all-time highs, and seven are near all-time highs.

Exhibit 2: Cross-Asset Benchmarks near All-Time Highs

Volatility on the rise

It is worth mentioning that the VIX index has been near an all-time low, but has increased 21.3% since Jan. 3 as the U.S. government has experienced a partial shutdown and tariffs have been imposed on solar panels and washing machines. With no shortage of political and macro themes to keep an eye on, watch this indicator to see if it will create a “cooling effect” on equities in 2018. Goldilocks’ porridge might turn out to be too hot.

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