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Briefing highlights

  • Stock market warnings mount
  • Retail sales slip 0.5% in December
  • Unilever to review strategy

Irrational something

Call it the Trump-era equivalent of Alan Greenspan’s “irrational exuberance.”

Some analysts suggest investors are living in a fantasy land, others that they simply may be giving Donald Trump too much benefit of the doubt.

But caution, it would appear, is being thrown to the wind.

“Everybody knows there has to be a big shakeout some time but the momentum is still firmly higher,” London Capital Group senior market analyst Jasper Lawler warned in a research note, referring to the optimism across stock markets since the U.S. presidential election.

“There’s a good chance we are witnessing a buy-rumour before a sell-the-fact on Trump’s tax and spending plans,” Mr. Lawler said later.

“I actually think he can deliver something worthwhile, just perhaps not enough to satisfy markets that have got up so much since November.”

THE GLOBE AND MAIL » SOURCE: QUANDL

Stocks have been on an absolute roll since the election, North American stocks hitting fresh highs.

But here’s a sampling of the warnings this week:

“Financial market reconciliation lies ahead. We are approaching the point of maximum optimism and the S&P 500 will give back recent gains as investors embrace the reality that tax reform is likely to provide a smaller, later tailwind to corporate earnings than originally expected.” David Kostin, Goldman Sachs

“Cognitive dissonance exists in the U.S. stock market.” Mr. Kostin

“Goldman Sachs’ warning [Monday] about ‘cognitive dissonance’ as earnings revisions fall even as the S&P 500 rallies is perhaps the canary-in-the-coal-mine moment. The only question now is whether investors will take notice.” Chris Beauchamp, IG

“Once again the question gets asked as to how long investors will give new President Trump the benefit of the doubt with respect to his new tax plans. We still remain no nearer to knowing the details of his phenomenal plans than we did a month ago, which rather begs the question as to whether the emperor’s new clothes are simply an exercise in hyperbole.” Michael Hewson, CMC Markets

“Despite warnings of drying liquidity for big investors, which increase the risk of potential headwinds, the VIX index (volatility index on S&P 500 futures) remains steady at about its 100-day average of 11.80. Based on stats, there are no visible signs of stress in the U.S. stock markets. Of course, a financial bubble cannot be predicted before it bursts.” Ipek Ozkardeskaya, London Capital Group

“Heightened political fears in Europe, ranging from Le Pen’s resurgence to Brexit, stand in stark contrast to the overwhelming expectation of greater prosperity under Trump’s rule in the U.S. With U.S. markets spiking to new all-time highs, it is simply a case of holding on for the ride as we seek to find out just how high U.S. stocks can go.” Joshua Mahony, IG

Capital Economics, in turn, expects developed markets to “continue to fare well for the time being,” based on its forecasts for economic growth. That doesn’t mean a non-stop run is in the works, though.

“Indeed, our view that the stock market in the U.S. will struggle to make more headway over the next two years, despite healthy economic growth there, is based on a view that profit margins will be squeezed by rising wages and an even stronger dollar,” said John Higgins, chief markets economist at Capital Economics.

“We also think that this will prompt investors to shy away from driving up equity valuations.”

Sales slip

Retail sales slipped 0.5 per cent in December as Canadian shops came up shy on holiday shopping.

After a string of gains, car dealers suffered a decline, though auto parts saw a rebound. Even stripping out autos and parts, sales dropped 0.3 per cent.

“Store types typically associated with holiday shopping registered weaker sales in December,” Statistics Canada said, citing declines at clothing, jewellery and luggage and leather goods shops.

When it all washes out, volumes slipped 1 per cent.

“Canadian data points had been on a strong run, but retail sales for December put a dampener on the mood,” said Nick Exarhos of CIBC World Markets.

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