With a 1,000 point jump in the Dow Jones Industrial Average (DJIA) within a span of six weeks, market experts are building a case of a correction in the short-term.
The US stock market has been on a gaining momentum hitting new peaks since the election of Donald Trump to the White House, on the back of so- called Trump Trades, which were built around the election promises of fewer taxes and regulation and more fiscal spending.
But market participants now fear that with valuation at the highest level since 2001 and actual unveiling of the policy announcements, traders would prefer to sell on news, after having brought on rumours.
“We are not too far off from the summer correction. We are approaching that seasonal period of correction. That also coincides with the 100 days of Trump’s presidency as well. We would have possible details on the healthcare plan and on the tax front. So the disappointment on the tax front could easily bring some correction in the market,” Naeem Aslam, chief market analyst with Think Markets told Gulf News over the phone from London.
Last week, the DJIA struck a peak of 21,000 level, after gaining 10 per cent since the election of Donald Trump as the new president. In the short term, Aslam expects a correction of 5-7 per cent in the US stock markets.
Even the valuations in the US stocks are the highest level in 16 years, worrying market experts.
“In the short-term, expensive valuation and risk of disappointment on high expectations of tax cut and infrastructure spending could be negative drivers,” Vaqar Zuberi, Head of Research - Hedge Funds/Portfolio Manager-Multi Manager Funds at Mirabaud Asset Management said over email.
“Disappointment on reflation is the main risk. In this context, modalities on the tax cut reform could be decisive in March. 50 per cent of expected earnings growth depends on the corporate tax cut,” Zuberi said.
UBS is still overweight on US equities due to the continued strong economic and earnings improvements.
“We believe US markets can continue to grind higher from here due to strong economic and earnings growth. Absolute valuations are relatively high but clearly not excessive. Still we cannot expect markets to move higher without the necessary earnings growth,” said Max Kunkel, ultra-high net worth investment strategist at UBS Wealth Management.
And the economic indicators are also positive.
Global economic data releases are beating forecasts by the most since May 2010, based upon Citi Economic Surprise Index data. Leading indicators such as the ISM index just rose to its highest since 2014. The earnings, margins are continuously expanding, feeding into the bull run.
UBS expects nominal GDP growth in the US to accelerate to 4.7 per cent this year from 2.8 per cent last, and S&P 500 earnings per share to grow 11 per cent in 2017
However Zuberi has a simple advice for investors.He advises to be selective on US equities by investing in companies with strong earning per share growth and companies that pay high dividends.