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Trump’s Promises: Skeptics See Overbought Market

Trump’s Promises: Skeptics See Overbought Market

As the major U.S. equity indexes reach new highs, many Wall Street strategists remain optimistic for 2017. Based on technical analysis, Barron’s columnist Michael Kahn said he sees the Dow Jones Industrial Average (DJIA) headed toward 21,000. He notes that recent surveys from the National Association of Active Investment Managers (NAAIM) and the American Association of Individual Investors (AAII), as well as the Investors Intelligence Sentiment Index (which looks at investment advisory newsletters), are all strongly bullish right now. The options market also is registering a highly positive outlook, with the buying of calls far outpacing the buying of puts.

Contrary Signals

All these signs of extreme optimism can be taken by contrarians as signs of what Alan Greenspan once called “irrational exuberance.” In his Dec. 14 column in Barron's, Kahn acknowledges that a popular metric used by market technicians, the Relative Strength Index (RSI), puts the S&P 500 Index at its most overbought level since January 2011.

Kahn also points out that the Value Line Geometric Index shows the market is now at the same resistance level that the market previously hit in 1998, 2007 and 2015 before retreating. Nonetheless, he remains bullish, writing, “There is no expectation that it will be a smooth road [to Dow 21,000] without pullbacks of varying degrees.”

Meanwhile, Merrill Lynch Global Research at Bank of America Corp. (BAC) offers this cautionary note: despite all the current exuberance, annual earnings per share (EPS) for the S&P 500 will have been flat for three years, based on their forecasts for 2016. They project a 9% gain in S&P 500 EPS for 2017, but this is mainly dependent on corporate tax reform and other factors such a buybacks.

“Trump is a Game Changer”

That is what Joe LaVorgna, chief economist at Deutsche Bank AG (DB), told Bloomberg. Whether Trump delivers on his campaign promises will have a huge effect on corporate earnings, the overall economy and the markets.

Given Trump’s advocacy of fiscal stimulus, the consensus of analysts quoted by Bloomberg is for rising bond yields, and thus an end to the recent bull market in bonds, also leading to a strengthening U.S. dollar. Bullish forecasts for the equity markets are largely dependent on Trump’s ability to deliver significant corporate tax cuts, as well as a tax holiday on repatriated overseas profits.

Not to forget, these bullish expectations are based on a U.S. President-Elect Trump who as a billionaire businessman was often criticized for his bluster and for failing to fulfill his promises. If he fails to deliver as U.S. president, the market's expectations could come crashing down.

 

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