As Deutsche Bank warns in a note over the weekend, the S&P 500 is “long overdue for a pullback” for one simple reason: the BTFDers (and central banks) have overextended the current rally in the S&P 500 to the point where it is now one for the history books. Traditionally, 3-5% selloffs in the S&P 500 have occurred on average every 2-3 months. By comparison, the current rally has now gone 10 months without even a moest a 3% correction, “making it the 3rd longest since World War II without one.” In fact, as the chart below shows, the only times an equity rally ran longer without a 3%+ selloff was in 1993 (11 months) and 1995 (1 year).
Not surprisingly, so far in 2017 virtually all of the (quite modest) selloffs that occurred, were associated with US political and geopolitical concerns and events—around the French election; the Comey dismissal; tensions with North Korea; US administration turnover and terrorist attacks.
However, as a result of the nearly $2 trillion injected by central banks YTD, all of these market “shocks” have so far proved to be fleeting and an invitation for the BTFDers to jump right in, and fill the gap within days if not hours.
So assuming the market is indeed poised for a correction, will that be the beginning of something more serious?
According to Deutsche Bank, the answer is no, because the bank’s chief equity strategist, Binky Chadha expecs the economic and market context to dominate. On the economic front, Binky sees further upside to global growth, with PMIs having further to recoup pre dollar and oil shock levels, a strengthening in the US labour markets and capex, while the he also expects earnings growth to sustain in the double digits. On the market front, he sees the demand-supply picture for US equities becoming more supportive with inflows on a turn up in data surprises and higher rates as inflation picks up.
