Risk-On or Range Bound?
The positive developments in the tariff war with China has helped the equities stage a comeback since a choppy August. As it becomes clear that the trade war is doing damage to our economy, I think the President will continue to mend his aggressive tone towards China as he looks for an agreement. The key to further sustain the gains in the stock market will be with the Federal Open Market Committee members when they meet this week (September 17-18th). Hopefully they deliver the 25-bps cut which the market has been widely expecting. The stronger than expected core-CPI (Consumer Price Index) inflation ex-food and energy as well as other economic data, has dented the market hopes for aggressive rate cuts. Also, the yield curve has started to steepen again after briefly ‘inverting’ several times in the last few weeks, which is also a positive development for the equity markets. This has quickly led to the risk-on scenario in the equity markets. According to Bank of America Corp. and EPFR Global data, stock funds globally attracted $14.4 billion on a net basis during the week through Sept. 11th, the biggest inflow since March 2018. Also, US equities were the primary beneficiary of a renewed appetite for riskier investments, posting the 10th biggest inflow on record at $17 billion.
Almost $15 trillion of negative yielding debt has distorted the global bond market mechanism and I believe, it has had some spillover effect on the US yield curve as well. It could be one of the reasons which led to the inverted yield curve in the US, as the international investors piled on US treasuries while the international sovereign yield turned negative.
According to Yardeni Research the earnings estimate for the S&P 500 for 2019 is about $165 and for 2020, ranges anywhere from $176 to $183. If we take the inflation assumption at 2%, the rule of 20 would give us 18x PE, valuing the S&P 500 at close to 3000. We will continue to monitor the financial market conditions and keep you abreast of further developments.
If you still have further questions about your investments, please feel to contact your Financial Advisor.
Source – Yardeni.com
Source: marketwatch.com and yardeni.com
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