A new year. So much going through my head. How great were the bowl games yesterday? Will Matt Harvey ever be Matt Harvey again? Can the Hall of Fame continue to keep the steroid abusers out? Does my wife need a vacation? Should I get my office the heck out of New York? How important is a Santa Claus rally anyway? Hmm.
I mean, in all honesty, we are coming off a darned good year. The S&P 500 scored 19% gains in 2017, only to be bested the Nasdaq Composite and Dow Jones Industrial Average. Despite some sideways December trading, the tech sector was still your runaway champion. Rock on. That said, five other sectors beat the broad market index, and only two, energy and telecom, posted minus signs for the year.
So, in my head, despite the historical data, I know that having a good week in between Christmas Day and New Year's Day is not really so important. However, the first couple of days of January, you would think that you would see positive money flow spread across the equity space. I will not panic if we do not see that, but the thought will linger in the back of my head for a while if we do not.
U.S. equity markets are still in a fairly sweet spot, if you ask me. A lot is still moving in the right direction. Yes, I know that liquidity conditions are tightening, or at least the sentiment is that those conditions are set to tighten, even if they do not actually change all that much. We will know, I believe, much more about that by this spring. I know the ECB has indicated that rates will remain unchanged beyond the last day of 2018. I know that their quantitative easing program seems to be written in stone until at least September.
Things change. People react. It is New York Stock Exchange trading floor legend Arthur Cashin who likes to remind us to "stay nimble". In 2017, one could maybe get way with sometimes clumsy trading. That likely changes this year, at least that is what I think. Perhaps a small nod toward volatility in the portfolio won't be such a bad idea this year, though you may have to chew on it for a bit.
No matter how much I try to tell myself that stocks are priced to perfection and that there could be squalls ahead, I come back to the fact that this most recent burst of market exhilaration, not euphoria (which is actually more dangerous) is still earnings-driven. 2017 was the best year for earnings growth since 2011, and at that time, let's face it, growth was easier coming out from a near-financial Armageddon. The earnings growth seen last year would be hard to repeat, but that performance does not have to be repeated -- the trend just has to stay intact.
The S&P 500 trades at 20 times the next 12 months earnings. Overvalued? Not really. I think it is safe to assume that if conditions of liquidity within the economy do tighten, multiples would move lower, but not all that much before support shows up, should earnings still grow. There is support for that. All 45 nations tracked by the OECD are expected to see their domestic economies grow in 2018. Will that hope become reality? I think that this might be a fairy tall outcome, but still, the picture is rosier than it feels.
(This is an excerpt from Stephen "Sarge" Guilfoyle's Morning Recon, which now appears exclusively on Real Money, our premium site for active traders. Click here for a free 14-day trial and receive Morning Recon every day, along with exclusive columns from Jim Cramer, James "RevShark" DePorre, technical analyst Bruce Kamich and more.)
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