The American stock market has reached another crucial strange. The forthcoming macroeconomic stats may trigger a major move in any of the 2 directions. International experts say that the future market reaction will depend on a number of macroeconomic stats as well as several events. However, the current bias seems to be bullish since at this point, there are no major reasons to expect another stock market crash within the next 12-18 months.
Over the period of early October - the end of 2018, S&P 500 lost around 15,6% but given the uptrend that preceded the mentioned downtrend, the overall annual performance in 2018 turned out to be -8,2%. The index started 2018 in the green zone. In particular, over the first 8 days of the year, S&P 500 gained 2,85% and reached 2580 points. At this point, international experts are trying to figure out whether this was a temporary recovery or the beginning of a new rally.
In reality, the bears sound really convincing. For starters, they still take into account the risk of the Fed raising the key interest rates this year. Since early 2018, the Fed has already implemented 4 interest rate hikes (from 1,5% all the way up to 2,5%). Every time this is happening, this is bad news for the stock market, so the market starts going down.
At the same time, the skeptics are talking about the possibility of higher inflation rates in the USA. For those of you who don't know, the inflation rate is directly related to the interest rates since curbing inflation is the key reason for tougher monetary policies pursued by the Federal Reserve. In January - November 2018, the inflation rate increased from 2,1% up to 2,5%.
The next argument to take into account is the statement about the reversal of the so-called yield curve of American
T-bonds. In early December, the 3-year U.S. T-bond yield increased the 5-year one. Stating from 1955, the yield curve has always indicated a forthcoming recession in the USA. However, in post cases, it was the change in the spread between the 2-year and 10-year bond yields that indicated the recession. For now, everything is fine with them.
At the same time, international experts name another reason to be concerned. In particular, they say that the current bullish cycle in the U.S. stock market has been abnormally long. The bears say economic cycles last for 10 years, but this statement should be treated as an emotional and opinionated look at the current situation. Historically, those cycles varied in length, with some of them being well over 10 years long.
The market hasn't reached the edge yet.
Some experts say that the stock market is driven by emotions. Sir John Templeton once said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” This is exactly what we could see in the late 1990s in the dot-com sector and in 2005-2007 in the real estate sector. The euphoria led to a crash and economic collapse. Still, the current market situation isn't indicating such triggers yet. Non of the sectors has euphoria. Real estate, industrial stocks, and commodities are all reasonably priced at this point. The P/E multiplier of S&P 500 has dropped down to 21 points, as opposed to 25 points seen 12 months ago. The forward value of the multiplier is 16,5. With that being said, the market hasn't reach this state yet.
At the same time, some other experts draw our attention to a couple of indicators. Those are said to have reached dangerous values right before each recession in the U.S. economy. At the same time, the Yield Curve and the PMI are the other 2 indicators that would find themselves in the red zone right in advance of another recession. At this point, non of the 6 key indicators has turned red. This leads us to belive that the market bias is probably going to stay bullish over the next 12-18 months.
