BUSINESS Spotlight: Analysts warn of pullback as US markets soar

BUSINESS

Spotlight: Analysts warn of pullback as US markets soar

Xinhua

14:58, January 21, 2020

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File photo: CGTN

WASHINGTON, Jan. 20 (Xinhua) -- U.S. markets are hitting all-time highs on trade deals, as well as on defused tensions between Washington and Tehran. But some analysts warn that investors may be driving up shares merely on emotion, and that a market pullback could be on the horizon.

Three factors have driven U.S. markets sky high in recent weeks. After a weeks-long game of tit-for-tat attacks between the United States and Iran -- underscored by the killing of Iranian Major General Qassem Soleimani -- U.S. President Donald Trump made it clear that he would not escalate the situation. The news was a boon for the Dow Jones Industrial Average, causing it to jump to new highs.

Soon after, the United States and China signed the phase-one economic and trade deal after nearly two years of negotiations, which roiled markets and gave investors the jitters. Right on the heels of that agreement, reports surfaced that the United States would soon sign a new trade deal with neighboring Canada and Mexico -- American's two biggest trading partners.

Markets cheered these three developments, which came just before what is predicted to be a solid earnings season among the biggest companies.

But some analysts are warning that too much emotion is driving the U.S. stock market, and that what goes up must come down.

"The bullish sentiment we're getting now has reached the uncomfortable stage," Jeff deGraaf, chairman of Renaissance Macro Research, said during a webcast with his company's clients, as reported by MarketWatch.

He said that during the tail end of 2019, he was willing to overlook signs of overconfidence because November and December tend to be solid months for markets.

"But now that we lose that seasonal tailwind, the sentiment picture is a little more concerning and some of the levels we've seen are, frankly, similar to what we saw in January of 2018," he said, referring to the S&P 500's more than 10 percent loss during that time.

Desmond Lachman, a resident fellow at the American Enterprise Institute, told Xinhua that equity valuations "now are very stretched."

"The market is liable for a large pullback should we get any bad news," Lachman said.

"Currently it seems to me that the market is priced for perfection and market participants are making the classic mistake of thinking that markets can only go up," Lachman said.

"The market also seems to be overly complacent that we will have no further problems with Iran and the Middle East," Lachman said.

Indeed, experts said long-standing U.S.-Iran tensions may continue after the tit-for-tat fight between Washington and Tehran in recent weeks, as Tehran has vowed revenge for the Soleimani killing.

Zacks Investment Research Chief Equity Strategist John Blank said that markets can sustain light jabs between Tehran and Washington, but if anyone throws a hard hook, it could upset markets.

"At this point everybody is pretty defensive. The real thing that would get everyone worried is if somebody got offensive. And offensive would mean bombing Dubai or bombing Iran," Blank said.

The markets can sustain these tit-for-tat smaller attacks, but if there were a large scale attack from either side, that would make a big difference, Blank said.

For example, if the United States were to bomb Iran, or something of similar magnitude, it would "lead to major market turmoil," Blank said.

Lachman said that despite what he described as an emotion-driven market, "when there is irrational exuberance as there is today, it can go on for a while."

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