The Daily Prophet: Whispers Get Louder as S&P 500 Hits Milestone

(Bloomberg View) -- Expectations for stocks this year were high after passage of the Republican tax cut. And even though the market has so far played along, with the S&P 500 Index rising above 2,700 Wednesday for the first time, traders are uneasy.

That's apparent in Bloomberg's crowdsourced "whisper" consensus estimates for more than 50 events. When it comes to the S&P 500, the forecast is for a mere 1 percent gain this year, according to Bloomberg Intelligence. That's less than the 7 percent average gain in a survey of major strategists by Bloomberg News. State Street Global Markets' index of institutional investor confidence, which differs from survey-based measures because it is based on the actual trades, as opposed to opinions, fell for a fifth straight month in December, the firm said last week. Investors bidding up stocks in anticipation of big profit gains from December's tax bill should be careful not to be too optimistic, Bank of America Merrill Lynch strategists wrote in a research note.

While boosting its estimate for the S&P 500 earnings per share this year by 10 percent to $153, the firm's strategists warned that tax reform “could be a headwind to growth in 2019.” The strategists worry that higher returns could encourage competition and hurt profit margins and the Federal Reserve could raise interest rates more aggressively in response to faster growth, according to Bloomberg News' Lu Wang.

JPMORGAN DEBUNKS BOND BUBBLE
As the biggest underwriter of bonds worldwide for six years running, it's safe to say that JPMorgan knows a thing or two about the debt markets. So you have to wonder how much of the rally in Treasuries on Wednesday was a result of a bold new report from the firm's strategists. They argued that rather than reflecting a bubble, the high valuations of benchmark U.S. government debt as seen in the current low level of yields are largely due to structural changes in the market, none of which appears likely to change over the coming year. They assert that yields are low because of a drop in term premiums on longer-maturity Treasuries, or the extra compensation investors demand to bear the risk of lending money for longer periods of time. Term premiums are low, and even negative for longer-maturity Treasuries, because of 1) "the increased transparency” of the Fed under Chairs Ben S. Bernanke and Janet Yellen; 2) lower volatility of inflation expectations; and 3) an increase in global currency reserves as a share of global GDP that have found their way into Treasuries.

LOOK OUT BELOW
The euro fell for the first time in more than a week against the dollar on Wednesday, and the Bloomberg Euro Index dropped the most since Dec. 14 despite a report showing Germany's unemployment rate fell to a record low. If the strategists at Bank of America Merrill Lynch are to be believed, the shared currency could be in for a lot of pain in coming weeks. The see the euro weakening more than 8 percent to $1.10 this quarter from about $1.20 on Wednesday. That is the lowest active forecast of the more than 100 strategists surveyed by Bloomberg. The euro has “overshot the data, market is long and underpricing Federal Reserve hikes and U.S. tax reform impact," the firm's head of G-10 currency strategy Athanasios Vamvakidis wrote in a research note. At the same time, Bloomberg News' Anooja Debnath reports that the market is long the euro and those positions could be at risk as BofA predicts the Fed could boost rates as many as four times this year, boosting demand for dollars.

OIL REACHES MILESTONE
The price of crude rose above $61 a barrel on Wednesday for the first time in two and a half years. But that's not the only notable thing about the move. Wednesday's 2 percent jump in New York-traded futures delivered exactly what the largest cohort of oil executives in a Dallas Federal Reserve survey last month said they needed to justify more shale exploration: prices above $61, according to Bloomberg News' Javier Blas and Meenal Vamburkar. If crude continues to climb and tops the $66 mark, even more corporate chiefs indicated they were ready to pile in, according to the survey. U.S. shale drillers have become OPEC's bogeyman because of their penchant for lightning-fast drilling expansions that threaten to undo the cartel's hard-won reductions of a worldwide glut. For the day, oil rose on speculation a U.S. report scheduled for release Thursday will show the longest decline in crude stockpiles since the summer driving season.

THERE'S A REASON IT'S A SELLER'S MARKET
Not sold on the global synchronized economic recovery theme? Then maybe a close look at the data that came out Wednesday will change your mind. The Institute for Supply Management said its monthly measure of U.S. manufacturing expanded in December at the fastest pace in three months, as gains in orders and production capped the strongest year for factories since 2004. Germany's jobless rate fell to a record low 5.5 percent, reflecting a boom in Europe's largest economy. JPMorgan lifted its 2018 economic growth forecast for China to 6.7 percent, above the consensus of 6.5 percent. It's no wonder emerging-market borrowers are starting the year by rushing to sell bonds. Argentina wants to pull off a massive $10 billion bond sale this month, and Mexico outlined a plan to offer securities, according to Bloomberg News' Pablo Gonzalez. In Indonesia, investors submitted a record 86.2 trillion rupiah ($6.4 billion) of bids at a bond auction Wednesday, exceeding the previous high of 56.8 trillion rupiahs set in August, according to Bloomberg News' Yudith Ho and Rieka Rahadiana.

TEA LEAVES
Get ready for more goods news on the labor market. On Wednesday, data from the ADP Research Institute is forecast to show that companies added 190,000 workers to U.S. payrolls in December, the same as in November and a level that's consistent with a healthy jobs market. With unemployment at an almost 17-year low, investors are closely watching for signs that wage gains are starting to accelerate, which could foreshadow faster inflation and influence the pace at which the Federal Reserve raises interest rates this year. The ADP report will be followed a day later by the one from the Labor Department. That one is also expected to show an increase of 190,000 jobs last month, down slightly from the 228,000 recorded in November but above the average of 174,000 for the year.

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Robert Burgess is editor of Bloomberg Prophets.

To contact the author of this story: Robert Burgess at bburgess@bloomberg.net.

To contact the editor responsible for this story: Max Berley at mberley@bloomberg.net.

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