“Is an equity correction imminent?”
Goldman Sachs’ top stock market analyst David Kostin says that’s the question everyone is asking.
“Clients keep asking about an impending equity downturn,” he wrote in a new research note. “Reasons cited include the 8-year bull market and economic expansion, high valuation, low volatility, Fed tightening, and politics.”
Ironically, awareness of this long list of worries may actually be making the market less vulnerable to a major sell-off — as it inhibits reckless buying. This brings us to the two key reasons why a market correction remains at bay.
Markets are not euphoric
“First, investors are not complacent,” Kostin said. “In Sir John Templeton’s timeless observation, ‘Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.’ Investors today are situated between skepticism and optimism.”
And this is not just based on the soft data coming from sentiment surveys. The hard data reflects conservative positioning.
“Few are euphoric as 27% of core managers are beating their benchmark,” Kostin added. “‘Tormented bulls’ best describes investor mentality. Alpha-seekers have normal cash positions (3.2% of mutual fund assets), active manager redemptions are offset by beta inflows (ETFs), and corporates continue to repurchase shares.”
Speaking of hard data, the fundamentals underlying the economy remain quite strong, despite all of the worries out there. This is the second reason why Goldman Sachs isn’t worried about a market correction.
Thomson Reuters data (by the numbers from This Week in Earnings, 10/20/17)
Fwd 4-qtr estimate: $142.24
P.E ratio: 18.1(x)
PEG ratio: 1.79(x)
SP 500 earnings yield: 5.52%
Year-over-year growth of fwd estimate: +10.13% versus last week’s +9.8%.
Eurozone economic confidence surges to highest in 17 years.
Euro-area economic confidence surged to its highest in almost 17 years, reflecting an improved outlook for a region that not long ago was blighted by record joblessness and a double-dip recession. The index of industry and consumer sentiment rose to 114 in October from a revised 113.1 the previous month, the European Commission in Brussels said on Monday. That’s the gauge’s fifth consecutive monthly increase and the strongest reading since January 2001. It compares with a median estimate of 113.3 in a Bloomberg survey. Sentiment increased across all sectors, according to the European Commission. After the past decade dealt the euro area two prolonged economic slumps, a sovereign debt crisis and an almost-exit of Greece from the single currency, the 19-nation region is experiencing a growth revival. Unemployment is declining and consumer spending, as well as corporate earnings and investment, are on the rise.
US consumer spending grows at fastest pace since 2009; core inflation benign.
Euro zone factories had their busiest month for over 17 years in November in a broad based acceleration, a purchasing managers' index showed, despite them hiking prices at the fastest rate in more than six years.
Forward looking indicators pointed to the momentum continuing through to the end of 2017, capping off what is expected to be the best year for euro zone economic growth in a decade.
"November's surveys produced a clean sheet of improved PMI readings for all countries, resulting in the best performance for euro zone manufacturing since the height of the dot-com boom," said Chris Williamson, chief business economist at survey compiler IHS Markit.
IHS Markit's final manufacturing Purchasing Managers' Index for the bloc climbed to 60.1 last month from October's 58.5.
That was above a preliminary estimate of 60.0 and the second-highest in the survey's 20-year history.
An index measuring output which feeds into a composite PMI due on Tuesday and seen as a good gauge of economic growth jumped to 61.0 from 58.8, its highest since February 2011.