Despite all the hype, volumes and open interest have been fairly small in Cboe and CME bitcoin contracts. » Read More
Earnings for the S&P 500 are expected to grow 11.8 percent in the fourth quarter, according to Thomson Reuters. » Read More
It is highly likely investors will demand unusually strong earnings beats and guidance to sustain prices. » Read More
With markets at historic highs and investor interest growing, some are wondering if there are enough shares to go around. » Read More
With the markets making quick work of Dow 25,000, here's the crucial issue: With so much good news now built into the market, is there room for higher prices?
Can you smell it? It's a slight whiff of euphoria around the stock market rally, the first time I have smelled it in a long time.
Oh sure, the market has been richly valued for a long time, but that's different than euphoria. A lot of people suddenly seem to believe that things are going to get a lot better in 2018.
Maybe, but remember one of the best things the market has had going for it for the past seven or eight years is how hated the rally has been.
Now people are starting to like the rally. A lot. Makes me a little nervous.
Here's something else that makes me nervous. The bar is now very high on the two most important components for stock valuations: economic data and earnings.
The Dow has passed 25,000, quite an impressive move considering it hit 20,000 on less than a year ago — on Jan. 17.
Many are still amazed that the market keeps advancing, but it's not incomprehensible.
It's a global rally. Reuters reported that China would stick with GDP growth around 6.5 percent as a goal in 2018. The Japanese market, which was closed Wednesday, finished Thursday at a 26-year high. Europe was up nearly 2 percent as euro zone businesses reported their strongest activity since 2011.
And in the U.S., the ADP jobs report at 250,000 was well above expectations of 190,000. This has been a trend recently, with economic reports coming in above expectations.
This year was a record-breaking year on all fronts for the ETF business: inflows of $476 billion, and assets under management swelling to $3.4 trillion.
For 2018, investors will continue to pour money into low-cost index ETFs. It will be great news for investors, who will benefit from even lower fees, but it will be increasingly tough for even the biggest companies to make money.
Where did all this money come from? Dave Nadig, CEO of ETF.com, says the answer is pretty simple: traditional actively managed mutual funds.
"This was a year of running away from high-cost alpha seekers into low-cost vanilla beta exposure," Nadig told me.
Remember when Marc Andreessen said, "Software is eating the world?"
In the ETF universe, indexers are eating the world.
U.S. equity ETFs attracted the biggest chunk of money, but international equity was strong, as earnings in Europe and emerging markets picked up and, despite lower prices, investors continued to put money into fixed income:
Will 2018 be a more "normal" year? 2017 was a year of surprises, but for 2018, not surprisingly, things are expected to be more, well, normal.
Which is why you should be suspicious.
It's true — by almost all measures, 2017 was one of the most extraordinary years in the history of the stock market. Investors saw:
What does all this mean? The stock market is a numbers game with a long track record. When you get numbers that are way out of the ordinary, it's logical to believe in mean reversion, that it is highly unlikely that returns or volatility will come anywhere near 2017.
That is exactly veteran market watcher Sam Stovall's advice to his clients. Stovall is chief equity strategist at CFRA, and in a note to clients advised that investors "would be better off anticipating an increase in volatility, a reduction in new highs, as well as a below-average price gain for the '500' in the year ahead."
Getting these extraordinary numbers tends to pull forward stock market performance. In years with above-average new highs and below-average volatility (exactly what we had in 2017), the S&P rose the following year only 55 percent of the time, with an average gain of only 3.1 percent, Stovall noted.
In years where the "dispersion" between the best- and worst-performing sectors was high (also what we saw in 2017), the S&P 500 was also up only 57 percent of the time in the following year, with an average gain of only 1.9 percent.
Stovall's conclusion: "As a result, one could say that in 2018 investors should expect more for less — more volatility for less return."
Get it? "Less surprise" is a big theme for 2018. Jim Paulsen, chief investment strategist for Leuthold Group, has noted that a good part of the stock markets' gain has been related to the string of strong economic numbers that we have seen recently: He notes that the U.S. economic surprise index rose to a 6-year high last week.
"Even if the recovery remains healthy in 2018, it can't continue to surprise," Paulsen says.
But why can't it continue to surprise? Peter Tchir, macro strategist for Academy Securities, is not so impressed with the "reversion to the mean" story.
Tchir notes that the global economic expansion continues, that earnings remain at record highs, and the tax cuts are pushing those numbers up: "It doesn't feel like the tax cut is being fully priced in, and there's no reason corporate America can't keep issuing debt and buying back stock. I'm not sure we can't have more of the same."
And absent some outside shock, why can't volatility remain low, he asks. "With ETFs, people have less need to chase daily trading, and I think that's a good part of the reason why we have seen reduced volatility."
Bottom line: Reversion to the mean does eventually happen, but we are in very unusual times.
Most people including traders are not very good at making predictions, even just a year ahead.
But Art Cashin has had a reasonably strong track record.
On December 14, 2016, I sat down with Art at Bobby Van's for our annual look-ahead. The discussion was dominated by the election of Donald Trump and its impact on the market.
The big issue at the time was the timing of tax cuts, with most predicting it would come early in the year. But Art was not sold, and his prediction was spot on:
"If we shift to the Supreme Court [nominee], we may not see corporate tax relief until nearly the end of 2017."
He also correctly predicted that the market would pause if it sensed that tax cuts were not imminent, which happened several times during the year:
"If he gets a corporate tax cut it will enhance the earnings for the S&P 500, and so therefore that will mean a repricing of the market...in all my years here I know the stock market is run on anticipation but when they look at what the actual timing is, they may pull back."
On the Fed and inflation, Art correctly predicted that the Fed would become preoccupied with deflation, not inflation:
"I will tell you the one thing that nobody in the market is looking for, that fears of deflation begin to reassert themselves by the end of the first quarter, Everyone is looking for inflationary pressure from the fiscal stimulus, but you may find the countervailing pressure, and you may get it from the small increases in interest rates we have been seeing...virtually no one is looking for that."
Art was also concerned about the wave of populism that might sweep through Europe after Trump's election:
"The populist revolt is a global event...and it may continue in Europe. It wouldn't take much to get the Italian government destabilized...Greece is not far from returning to crisis again. You can say, I've seen this movie before and nobody dies, but it's a slightly different movie this time."
It didn't quite turn out that way: while populist parties did gain in European parliaments, populists were turned back in the top leadership positions throughout Europe.
Bottom line: three out of four isn't bad.
UBS' Art Cashin joined me at the bar at Bobby Van's Steakhouse across the street from the New York Stock Exchange for our 10th annual look at the year ahead, and the year that was.
Art's two biggest worries for 2018 are:
Art also talked about bitcoin mania. He said it may not work out the way the bitcoin enthusiasts think it will. The government will likely want to use the blockchain as a way to transition to a cashless society and use it as a way to keep track of where the money is, Cashin notes. This is the opposite of what many believe the intent of bitcoin was, which was to keep most transactions private and away from the government, he added.
More from Art in the video, including how much more stocks can run on tax cuts, and his biggest surprise of 2017.
Investors looking to get a piece of the market surge poured cash into stock funds at the highest pace ever.
No one in his position has ever talked up stocks as much as Donald Trump, and it's worth considering whether it is risking a bubble.
Some traders at the largest Wall Street banks are about to get big, fat zeroes for bonuses while they watch markets thrive.