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Stock rally endurance gains supporters

The notion that the US stock market rally will endure over the next 12 months is gaining momentum.

One of optimists is Tom Elliot, international investment strategist for deVere Group, who believes the “euphoric rally” of US stock markets is sustainable throughout this year.

At the beginning of last week, America’s leading market indices - the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite - finished at a record high following the end of the government shutdown.

The shut down saw parts of the US government close down until President Trump and Congress could agree spending plans.

Earlier in the year there were fears of a global equity market correction within the next 18 months, a scenario which now appears to be less and less likely.

The only risks could be a US recession or bank account rates or bond yields rising sufficiently to persuade investors to sell shares and invest in risk-free assets. But Elliot said there is no evidence of a recession, inflation is low and the Federal Reserve is cautious.

Concerns about increased volatility at the end of the first quarter have also been rejected.

“I believe that the current rally is sustainable through 2018, with the worst scenario perhaps being a strong early part of the year, followed by consolidation - with minimal gains - over the rest of the year,” said Elliot.

The weak dollar boosts export earnings, strong consumer confidence supports domestic-focused sectors and US stock markets are likely to be supported by continuing strong corporate earnings growth.

With a record-breaking stock market performance and stretched valuations some commentators have suggested that stock markets were in bubble territory - but Mark Peden, co-manager of the Kames Global Equity Income Fund, said that while stocks were not necessarily cheap, they were not outlandishly expensive either.

“The party will most likely stop when the Fed wants to get ahead of the curve and feel they need to take interest rates to levels that choke off any damaging wage inflation pressures,” Peden said.

And Thomas Wells, multi-asset fund manager at Aviva Investors, said that while valuations may be high they can still go higher.

“Even the likes of Jeremy Grantham, founder of the investment management firm GMO, has begun warning clients to prepare for what could be a near-term melt-up in stock markets. In the last six months we have reached base camp, perhaps, for a final possible assault on the peak.”

Wells said he remained overweight in equities and he added: “Enjoy this risk-on rally, but remember it will not last forever. So be prepared to de-risk when the time comes.”

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