With optimism growing that Congress will soon be passing tax relief for millions of Americans, stocks rallied in late November and early December to push the Dow Jones Industrial Average above 24,000 for the first time. The S&P 500 also rocketed ahead to break through 2,600.
According to Reuters, a year of “strong corporate earnings, robust economic data and hopes for corporate tax cuts” helped the Dow cross “four 1,000-point milestones” in 2017 and gave the S&P and Dow eight straight months of gains.
But Bank of America Merrill Lynch is predicting “capitulation” for the bull market in 2018 and the firm is preparing to “downgrade risk aggressively” when they see that the rally is over after the first half of the year. CNBC reports that BAML is telling clients: “We will downgrade risk aggressively once we see excess positioning, profits, and policy.”
CNBC reports that Bank of America is also warning about wage inflation, saying if it again fails to materialize, “the era of excess liquidity” lets a bubble last until 2019. This scenario would then trigger a bear market because of subsequent “hostile Fed hiking, Occupy Silicon Valley and War on Inequality politics.”
According to Bloomberg, Goldman Sachs International strategists are also warning of an upcoming bear market. To explain, with the economy on the upside and tax reform on the horizon, central banks will begin cutting back their quantitative easing, and returns are “likely to be lower across assets” over the medium term. Analysts say there is also a chance of “fast pain” where stock and bond valuations would get hit after being at an all-time high this year.
Goldman analysts say investors should “stay invested” but put “more in equities” and “scal[e] back duration in fixed income.”