Analysts: Why 2018 Will Require More Risks and More Skill
11/22/2017 6:00 am EST
The remaining weeks of 2017 are full of risk events for traders, writes Bob Savage, CEO of Track Research over the weekend.
The calendar of events in the few weeks left for 2017 is full of risk events:
--from the Dec. 4 Eurogroup meeting with Greece and Brexit issues
--to the Dec. 8 U.S. debt ceiling limit expiry
--to the Dec. 12-13 FOMC meetings with a rate hike priced but little for 2018
--with Dec. 14-15 the EU summit – the last chance for Brexit talks
--and then Dec. 21 the Catalonia vote in Spain where hope for a national rather than separatist outcome has helped Spanish debt.
What seems most notable given all those risks is how calm markets remain. Last week we asked whether markets had peaked and the response from Thursday was to buy-the-dip more aggressively.
The coordinated global recovery and extremely low rates helped generate great earnings around the world, which has pushed risk assets higher this year and most see that continuing until the end of 2017.
Many analysts now see the next year as one where returns will require more risk and more skill. There are 4 key points behind this argument:
Valuations are stretched. S&P 500 Index (SPX) is 18 times earnings – well above the 15 long-term average. Small caps are 25 times earnings – which is the 96th percentile. When values are expensive returns are lower – 4-8% rather than 8-12%.
Geopolitcs – with focus on debt particularly in China, Oil prices and Saudi/Iran, North Korea and its nuclearization, Russia and its ongoing push for more power along with U.S. politics and the mid-term elections.
Positions. Investors have shifted from high cash to low cash in portfolios. The latest BoAML survey showed investors at 4.4% cash – the lowest since 2013. ETFs and passive investing styles have increased their share of holdings, making the market vulnerable to more correlated downturns. The buy-the-dip mentality could turn if portfolios see less return on risk.
Monetary policy. The flatter curves in the U.S. and the risk of a credit squeeze with higher rates not leading to a steepener. Credit spreads are clearly under the microscope for 2018 and the role of the normalization in the Fed balance sheet will be watched.