Are Strong Fundamentals Fully Priced in Stocks?

The economic fundamentals look strong, as I’ve been pointing out in my blog.  But, stocks appear to be fully or more than fully priced for the strength, according to technicals and historical p/e ratios.  Since seasonal market strength and expectations of strong Q417 corporate earnings argue for stocks to rally into February, a flat market for the next few weeks would support the idea that stocks are fully priced.  A lightening up of positions would be warranted if this turns out to be the case.  Even so, there is a good possibility that stocks will not correct significantly or may even rally further once the earnings season ends in late February, as consensus may be underestimating the economy's momentum.

The US economic data should remain strong in this first week of the new year.  In particular, the December Mfg ISM, due Wednesday, risks printing above the flat but still high 58.2 consensus estimate.   Most other manufacturing surveys rose this month, although the m/m direction of any of them is not well correlated with that of the Mfg ISM.  As for Friday's December Employment Report, consensus looks for +189k Payrolls, which would keep the pace above the 174k monthly average between January and November.  The consensus estimate of an above-trend +0.3% m/m for Average Hourly Earnings fits with calendar considerations, and the y/y would stay moderate at 2.5%.  AHE averaged a tad under 0.2% m/m so far this year.

The most important economic report very well may be Q417 Real GDP, due January 26.  Another quarter with a "3" handle on the growth rate could prompt Street economists and the media to lift their 2018 forecasts from the low-to-mid 2% range.   A ratcheting up of economic growth expectations could sustain the stock market rally into the Spring (in line with the 1987 experience, see my prior blog).  At this point, the Atlanta Fed model is projecting 2.8% (as of December 23) for Q417 Real GDP Growth, while the NY Fed model is projecting 3.9% (as well as 3.2% for Q118 GDP).  The Atlanta Fed model seems to me to be underestimating Consumption Growth.  I would not be surprised if its GDP forecast is lifted as we get more data.