Stock Market Valuation
Trump is blaming the Fed for the recent poor stock market performance. For once, he may be right.
The recent market plunge took the stock market PE from the top of my fair value band through the bottom. The last observation is the 14 December close. The fitted PE has is a function of both short and long term yields. This approach implies that the market is now cheap, but that does not necessarily mean that it is a buy.
Figure 1
Maybe you would prefer a leading indicator approach. In this case real MZM growth ( zero maturity money= M1 +money market accounts). It is obvious that MZM growth is still weakening and signalling that the market PE should contito fall. It is just the simple theory that stock market liquidity and movement are driven largely by monetary policy and right now monetary policy is tight enough to drive the market below the fair value band. Moreover, since MZM growth is still weakening it implies that the market downdraft is not over.
It isn’t the Fed. It is oil related in the short run…………….. again as financial debt really started pumping oil production back up in the 4th quarter of last year despite prices not supporting it yet. They took the gamble oil prices were going to rise throughout the year, then the KSA,Kuwait and Russians start pumping, causing another spike in inventory, which caused a collapse. Oil is the largest US manufacturing right now, in terms of growth. Financial markets are going to get rolled like in 2015-16.
It’s the Federal Reserve. Why risk my money in the market when yields are rising?
Because yields are not rising.
Short term rates are rising while
long term rates have rallied recently
after rising earlier in the year.
The key question may be, does the recent rally
in bonds represent a short term move that will
soon reverse or is it a significant trend reversal.
Even short term rates aren’t rising much.