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The markets are currently trading on euphoria, strong confidence, and high expectations. They are at all-time highs with multiples at highs as well. As a team, we are believers in “sector rotation”. A break in optimism could cause corrections and we expect to start seeing industry sectors rotating out of the euphoric state before the end of the first quarter of 2018.

What is driving the market upwards?

Many positive indicators are driving the market upwards. Innovations in technology, high-GDP numbers, improving retail sales and inventory numbers as well as potential new tax legislation are all creating positive sentiments. Fundamentals are looking good with strong global trade activity and good company revenues.

Following Trump’s election, global markets rose due to his promises of increased spending on infrastructure and tax reforms. Deregulation, cutting taxes and infrastructure investment programs all suggest future growth.

The rebuilding of infrastructure after the fires in California and hurricanes throughout the world will also affect spending. This effect will be seen all the way from retail level up to large redevelopment companies - from gas and electric companies all the way up to corporate lease companies and those involved in building expansions.

Less than positive indicators

High expectations may be dashed as anticipated business development is not as good as expected and optimism about tax cuts may be overblown. Treasury Secretary, Steven Mnuchin believes that the stock market will tumble if tax cuts are not passed. It probably won’t be due to this alone but there are other signs that can’t be ignored.

As a team, we believe we’re going to see major sell-offs (in specific sectors) as investors rush to get rid of stocks when their expectations are disappointed. The overall market may not see a massive downturn; however; This can be temporary very punishing to stocks.

Anticipations can work against you

Positive sentiment is good but unrealistic anticipations can work against you. Hope in Trump’s policies may offer disappointment because it’s unclear what will be accepted by Congress or not and his programs are deficient on details.  Swift action may be taken as investors attempt to rid themselves of stock. Sometimes a 3% earnings miss can cause a stock to fall by 20 or 30% or even more.

It’s also important to be aware of “technical trend gap-downs” on security prices. The fact that markets are betting on fundamentals should also be taken with caution and fundamental deteriorations will only be magnified on the way down.