U.S. equities are on a surprising rally and the voice of reason suggests that the current market rally has gone on quite far too fast. However, investors have fewer reasons to believe in the prophets of doom because the rally is still going on strong. Two top Wall Street analysts have lent their voice to the bullish sentiments. This article seeks to explore where equities are actually headed amidst the din of unending stream of analysis from different commentators on the wisdom/foolishness of chasing the rally.
Why are investors worried about equities?
If we were to go by the voice of ‘reason’ U.S. stocks should have been struggling to stay afloat since Donald Trump won a surprise victory during the 2016 election. Prior to the election, Wall Street had largely been worried about the potential implications of a Trump presidency for the stock market. Analysts were worried that a Trump presidency could lead to an unprecedented level of uncertainty in the global market.
Interestingly, Trump won the election and stocks have been on a massive rally ever since. The chart below shows how stocks have fared since Trump won the election last year until Wednesday February 15.
The performance of U.S. equities was particularly bullish on Wednesday February 15. The S&P 500 marked 87 consecutive sessions through which it didn’t record a 1% decline – the index has booked a decent gain of 9.80% since Trump’s victory.
The Dow Jones Industrials is up 12.43% since Trump’s victory and it has crossed the elusive 20,000 mark. The tech-heavy NASDAQ has gained 12.05% since Trump’s victory despite the fact that Trump has had some spats with some tech firms such as Apple and Amazon during his campaign. The uptrend in the NASDAQ marks the seventh straight session of gains in the index.
From the foregoing, market bears have legitimately strong reasons to be worried about the fate of the market. The fact that stocks are rising when Wall Street analysts had largely expected it to fall is enough reason to be worried that the rally is too good to be true. In fact, some Lionexo binary options traders have started calling the current rally the “Icarus Rally” because it is resplendent of a Greek mythlogy in which Icarus flew started flying higher and higher on a wing of wax until he flew too close to the sun. Of course, his wax wings melted and he crashed to his death – if the Icarus trade is true for equities, stocks might eventually have a sharp and rapid correction into bear territory.
Two Wall Street analysts think stocks still have a longer way to go (for now)
The first vocal analysts making strong arguments in support of the current rally in the market is Binky Chadha, chief global strategist at Deutsche Bank. He submits that stocks are actually soaring because Trump’s vocal nature provides a strong direction about the intents and plans of the current administration. He believes that the fact that Trump’s words can help you know what he is planning per time removes much of the fears of uncertainties that Wall Street had forecasted under his government.
Of course, one can make strong arguments on both sides of the debate about whether Trump’s policies are good or bad. Nonetheless, the fact that he says what is on his mind eliminates uncertainty and you can then make informed trading and decisions in response to the government’s plans and actions. Binky Chadha believes that the S&P 500 still has more room to soar. He expects the S&P 500 to reach 2600 by the end of year to mark 11% upside from the current price.
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch is also vocal in his support for the bullish rally. He believes that U.S. equities still have more room to soar before the inevitable correction eventually begins. Hartnett’s bullish stance is hinged on the thesis the current rally in stocks is already a self-fulfilling prophecy because the rally is attracting new investors and the inflow of funds from new investors is further fuelling the bullish sentiments in the market.
Hartnett submits that U.S. indexes could record another 6% in gains as investors continue to pile into the market in order to book gains. In his words, “measuring fear is easier than measuring greed” and greed will continue to drive the rally until the rally becomes unsustainable. He submits that the rally will end in a sharp reversal– when massive profit taking starts or when earnings fail to live up to expectations.