Most major stock indices have recently hit all time highs. Many of the 2018 year end S & P 500 targets were hit in just 15 trading days.
Firstly, here’s a summary of Wall Street’s 2018 targets for the S & P 500,
Credit Suisse: 3,000
JP Morgan: 3,000
Oppenheimer: 3,000
UBS: 2,900
Jefferies: 2,855
Deutsche Bank: 2,850
Goldman Sachs: 2,850
Bank of America Merrill Lynch: 2,800 3,000 – Changed on January 23rd (after the previous target was reached in just 13 trading days)
Citi: 2,800
The S & P 500 closed at 2,839.25 today (January 25, 2018)
So, what is driving stocks higher?
1. Liquidity
Central Banks have created loads of new money with quantitative easing. There is simply too much liquidity in the markets.
2. Too little choice for stocks
There are far fewer listed companies globally now then there were 20 years ago. 20 years ago, there were over 8000 stock market listed companies in the US, that number has halved by 2018.
3. Merger and Acquisition activity has resulted in profit concentration in a few companies
In the US the top 200 companies (exchange listed and private) account for around 90% of all corporate profits. Again, with very little choice, valuations are soaring especially for the very big listed companies.
4. Central Banks buying stocks themselves
The Bank of Japan has a target to buy 6 trillion Yen ($54 billion) worth of exchange traded funds a year. It now holds almost 82% of all ETFs in Japan and is indirectly the largest shareholder in many large Japanese companies. We covered this here.
Likewise, the Swiss National Bank has around $800 billion in foreign currency investments. Amongst its famous holdings are a $3 billion investment in Apple (and it has been buying more shares) and a $1.5 billion investment in Facebook. We covered this here.
5. Norway’s sovereign fund
Norway’s trillion-dollar sovereign wealth fund is increasing its exposure to equities to 70 percent of the fund’s value from 60 percent earlier. That is another $100 billion to be invested in stocks.
6. Sinking bond yields and the negative/zero interest regime
We covered the countries with negative or zero interest rates here and recent bond yields here. With bond yields negative in some instances and bonds yielding close to nothing money is moving to riskier assets like stocks.
7. Money pouring into Pension funds and Pension funds pouring money into stocks
We recently wrote that government and private pensions are running deficits due to low bond yields here. To cover some of the deficits the allocation to risker assets like stocks has been increased. Likewise, governments like the UK government probably know they won’t be able to pay out a government pension in the future (or pensions might be means tested) so they have auto enrolment to a private pension via the workplace. The amount being invested in currently 2%, going up to 5% in April 2018 and 8% in April 2019. Last year, the total private UK pension contributions increased 21% and that is projected to go up 30% in both 2018 and 2019. We wrote why you shouldn’t rely on a government or state pension in the future here.
8. Algorithms are doing most of the trading and volatility has been killed
Most equity trading today is done by algorithms and not humans. The Volatility Index (VIX) has collapsed over the past few years and 2017 saw all time lows for the VIX. Algorithms it appears only like stocks going up in one direction (upwards for now).
9. The fear of missing out
The last few weeks have seen record amounts of retail money entering the markets either directly or via investment funds. The fear of missing out (on soaring prices) seems to be driving up the markets further.
10. Corporate buybacks
Last but not the least we think corporate buybacks are the biggest reason for soaring stock prices. Companies have engaged in the greatest debt funded buy back spree ever. Global debt (not just corporate global debt) is up over 60% since the 2008 crisis, corporates are borrowing because of low interest rates to buy back their own stock at high valuations.
“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” – William Feather