News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site. See our updated Privacy Policy here.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
Subscribe
Please try again
More View more
Real Time News
  • Do you know how to properly Identify a double top formation? Double tops can enhance technical analysis when trading both forex or stocks, making the pattern highly versatile in nature. Learn more about the double top formation here: https://t.co/t9FlspUVZz https://t.co/9kfBu04auM
  • Dealing with the fear of missing out – or FOMO – is a highly valuable skill for traders. Not only can FOMO have a negative emotional impact, it can cloud judgment and overshadow logic. Learn how you can control FOMO in your trading here: https://t.co/lgDf5ddzFV https://t.co/8GJ6OQYgnW
  • Bitcoin (BTC) started the day on the front foot on the Twitter news before the latest China crypto ban hammered the market lower. Get your weekly crypto forecast from @nickcawley1 here: https://t.co/ZKHGXeVhsR https://t.co/QSltMQml6N
  • Greed is a natural human emotion that affects individuals to varying degrees. Unfortunately, when viewed in the context of trading, greed has proven to be a hindrance more often than it has assisted traders. Learn how to control greed in trading here: https://t.co/kODPAfJE79 https://t.co/DSp7f3YuAx
  • Technical analysis of charts aims to identify patterns and market trends by utilizing differing forms of technical chart types and other chart functions. Learn about the top three technical analysis tools here: https://t.co/KDjIjLdTSk https://t.co/HNqHcbL6vk
  • The US Dollar continues to push higher against ASEAN currencies after the FOMC rate decision. This leaves the USD/SGD, USD/THB, USD/PHP and USD/IDR outlook mostly tilted higher. Get your market update from @ddubrovskyFX here:https://t.co/zn56iTFBxM https://t.co/FbepD4RaFg
  • The US Dollar seems to be back on the offensive against its major counterparts, pressuring EUR/USD and NZD/USD lower as USD/JPY consolidates. USD/CHF surges past key resistance. Get your market update from @ddubrovskyFX here:https://t.co/MrLGSp7FYa https://t.co/XS0176LyOg
  • The Japanese Yen remains in focus with strength potential on risk aversion themes to go along with weakness on themes around higher rates. Get your weekly $JPY technical forecast from @JStanleyFX here: https://t.co/l4UICqJzJy https://t.co/dQ2pS0E4fp
  • Google finance-related search interest in 'Evergrande' has almost overtaken 'Covid'. 'Taper' doesn't even register on the scale https://t.co/P6H9sHFVIB
  • Gold prices gain as potential systemic risks out of China's Evergrande Group roil broader markets. Meanwhile, iron ore is ticking higher after a big drop on Monday as China steps up steelmaking curbs. Get your market update from @FxWestwater here:https://t.co/l4kAWDJ2wm https://t.co/b9m5ADIqqb
Will the S&P 500 Extend Its Record Rally on Reflation Hopes?

Will the S&P 500 Extend Its Record Rally on Reflation Hopes?

Margaret Yang, CFA, Strategist

S&P 500 FUNDAMENTALFORECAST: BULLISH

  • A ‘Blue Wave’ outcome propelled hopes for more aggressive fiscal and infrastructure spending
  • Weaker private jobs report painted a souring picture in the services sector
  • The S&P 500 index is trading at 30.3 price-to-earnings (P/E) ratio, far above its 5-year average

The exuberant rally in the S&P 500 index looks set to carry on as investors buy equity and other risk assets on reflation hopes – expectations that the Biden administration will be empowered to push forward fiscal and infrastructure spending after Democrats won two critical seats in Georgia’s Senate runoffs last week. In the meanwhile, base metal and crude oil prices surged to multi-month highs, reflecting a rising demand outlook as a cyclical recovery appears to be underway with the gradual rollout of Covid-19 vaccines.

Reflation refers to fiscal or monetary support that is introduced during economic downturns to spur growth and boost inflation, which usually occurs after an economic downturn. With the political chaos in Washington seems to be finally drawing to an end, investors appeared to have herded into stock markets chasing yield and growth.

Cyclical-linked energy, materials, financials and industrial sectors have been outperforming since the end of last year, extending a rotation into value from big tech names. The reflation trade may encourage a catch-up rally in the Dow Jones and S&P 500 index, both of which have largely underperformed relative to the Nasdaq 100 during 2020 as the pandemic hit traditional industries harder.

Index

Last Price

% Return in 2020

P/E Ratio

NASDAQ 100 STOCK INDX

2,939

47.0

39.8

S&P 500 INDEX

3,803

15.6

30.3

DOW JONES INDUS. AVG

31,041

6.5

25.9

Source: Bloomberg

Yet, are market participants too optimistic about the economic outlook and pricing in a rosy picture of recovery too early? We are seeing a strange picture that is unprecedented – stock markets hit record highs when the global economy is suffering from a severe Covid-19 crisis that may last longer than people may have expected. A new strain of the virus and increasing lockdown measures may slow the pace of economic reopening, especially in smaller economies that lack the domestic market depth to cushion against external headwinds. The effectiveness of Covid-19 vaccines remains to be proven in the public, and an uneven rollout in different countries may undermine a global effort to contain the spread of the virus.

More worryingly, job market sentiment is weakening against the backdrop of pandemic waves and social distancing measures. In December, the US private payrolls report registered its first negative print in six months, with 123k job lost (chart below). It marked a sharp contrast to the baseline forecast calling for an 88k increase. The job losses were heavily concentrated in the leisure and hospitality industry, which pointed to the severity of pandemic’s impact on the service sector.

US ADP Employment Change

Will the S&P 500 Extend Its Record Rally on Reflation Hopes?

Source: Bloomberg, DailyFX

Valuation-wise, the S&P 500 index is trading at a 30.3 price-to-earnings (P/E) ratio, which is the highest level seen in two decades and is nearly 50% above its five-year average of 20.5. Rich valuation may render the index vulnerable to profit taking, especially in a market that has nearly priced in all the available positive news and even future growth.

S&P 500 Index vs. P/E Ratio – 5 Years

Will the S&P 500 Extend Its Record Rally on Reflation Hopes?

Source: Bloomberg, DailyFX

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES