How much of where equities are today has come from quantitative easing (QE)? For a long time the answer to this question has not really been that important to equity investors. But now, with central banks moving towards shrinking their balance sheets, it’s a question equity investors can no longer ignore. My view is that QE may not have contributed much to the equity rally and therefore its unwinding may not be a major concern either.
After eight bull market years and with strong macro data all round, recession and bear market memories must surely be fading. Still, signs of exuberance or great bullishness are difficult to find; at most there is cautious optimism. Why? One of the most common push-backs against an equity bull case is that equities are too expensive. I can see where this concern comes from, but believe it’s something to push back against. Here are my top 10 points on equity valuations.
Going into 2017, the market consensus was one of a strong US dollar environment, with the expectation of the US engine firing on all cylinders, with support from fiscal policy, monetary policy and de-regulation. The engine has stuttered, the US dollar has been declining all year and not many US dollar bulls are left. We are taking stock.
As our attentions turn to outlooks for the year ahead, it's best to avoid messages from perma-bears, perma-bulls and the hopelessly vague. However, clairvoyance is not a strategy. Instead we should try to favour sound analysis and be more willing to think (and talk) in probabilistic terms, or as I like to call it, shades of grey.
Seven years into this bull market, how is it that equities continue to rally? I share investors' scepticism, but not because of the duration of the bull market or the size of the rally. I struggle to find reasons to be bullish on the two fundamental drivers of equities: earnings and valuations.
Some of the readers of Macro Matters have asked me whether I had perhaps written the last one, “The good and bad of low growth”, from a remote island during one of my shark diving trips, completely separated from markets, as I didn’t explicitly comment on all major events and headlines.