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Strategas Research: Bull Market's Load-Bearing Wall Starting to Crumble

Strategas Research: Bull Market's Load-Bearing Wall Starting to Crumble
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By    |   Saturday, 26 August 2017 02:32 PM

The recent bull run in the stock market reportedly may be on its last legs because the tide that lifted all stocks apparently is starting to recede.

Strategas Research Partners warns that robust corporate earnings growth, attributed by many financial experts as the biggest contributor to share-price appreciation, is starting to wane.

A “big part of Strategas' argument stems from the fact that the period against which current earnings are compared — the first half of 2016 — was notably weak. And that, in turn, pushed year-over-year growth to unsustainable levels,” Business Insider recently explained.

"Last year’s easy comps become this year’s tougher comps starting now, so the natural progression is for the growth rate to slow," Nicholas Bohnsack, the president and head of quantitative research at Strategas, wrote in a client note.

"Adjusting prevailing estimates for the historical revision baseline, which is negative, shows earnings growth falling to mid-single digits rates by next year," Bohnsack

"This is not to say earnings will begin to decline straightaway, but they will mathematically increase at a decreasing rate," he continued. "This progression is typical of a late-cycle profit re-acceleration running out of steam."

In addition, sales growth and GDP look "toppy," he warned.

To be sure, Strategas is far from alone in warning of upcoming volatility in the markets.

Spooked American investors pulled $2.6 billion from U.S. stocks during the last week as U.S. equity funds suffered their longest outflows streak since 2004, Bank of America Merrill Lynch data showed.

Investors have been losing faith that President Donald Trump can deliver on his ambitious tax cut and spending campaign pledges.

U.S. equity funds suffered their longest streak of outflows in 13 years as growing signs of political deadlock in Washington cast doubt on a rally that has taken the S&P 500 Index to record highs, Bloomberg reported.

Investors pulled $2.6 billion from U.S. stock funds in a 10th consecutive week of outflows, Bank of America Merrill Lynch said in a research report citing EPFR Global data. That takes total outflows since late June to $30 billion, according to the report, which covered the week to Aug. 23.

The outflows are yet more evidence traders are shunning the U.S. in favor of better growth prospects and more stable politics elsewhere. A bull run in the nation’s stocks has faltered this month as confidence wanes in the White House’s ability to push through pro-growth policies.

For much of the year, money that’s been leaving U.S. stocks has found a home in Europe. While the region’s equity funds posted their first outflow in seven weeks, the $200 million that left is dwarfed by this year’s inflows which now total $32 billion, according to the report.

The S&P 500  is down over 1 percent so far this month, having rallied almost 9 percent year-to-date, whilst U.S. tech stocks have surged over 22 percent so far this year.

But investors have grown increasingly concerned about stretched U.S. equity valuations, with Trump’s inability to usher legislation through Congress raising doubts about his campaign promises to cut taxes and boost spending, Reuters explained.

Trump has dismantled two of his business advisory groups after several chief executives quit following his response to racially charged protests in Charlottesville, Virginia. This further eroded confidence in Trump’s ability to enact his reforms.

A late-September deadline is now looming for U.S. officials to raise the debt ceiling or risk default, leading investors to anticipate a volatile month.

“Since late June investors have withdrawn $30 billion from U.S. funds while adding $36 billion to the rest of the world,” said BAML’s analysts, citing inflows to emerging markets, Europe and Japan.

Japanese equities attracted $3.1 billion over the week, their biggest inflows in five months, whilst emerging markets pulled in $200 million.

Emerging market equities continued to top BAML’s table of cross-asset winners in 2017, returning 27.1 percent year-to-date in dollar terms. European equities were in third place, delivering 18.7 percent, but suffered their first outflows in seven weeks, losing $200 million.

Overall, global equities attracted $3.1 billion, whilst bond funds pulled in $5.5 billion, with government bond and Treasury funds enjoying their largest inflows in 10 weeks at $900 million.

Investment grade corporate bonds continued to attract the lion's share of the fixed income flows, pulling in $5 billion, whilst emerging market debt funds attracted $1.9 billion. High yield bonds suffered their second straight week of chunky outflows, losing $2.2 billion.

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The recent bull run in the stock market reportedly may be on its last legs because the tide that lifted all stocks apparently is starting to recede.
stock, market, bull, crumble
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2017-32-26
Saturday, 26 August 2017 02:32 PM
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