Article by ForexTime
Led by Wall Street, global equity markets continued to enjoy one of their best starts in eight years. The Japan’s Nikkei 225 marched to a new 26-year high after the S&P 500 and Nasdaq Composite set record closes in the previous session. In Europe, the FTSE 100 made a new high on Monday before retreating slightly to close 0.36% lower, meanwhile the German Dax is only 1.2% shy of its all-time peak reached in October last year.
There’s no reason not to be optimistic when global growth is expected to run above average; inflation remains muted, and U.S. tax reforms are driving up U.S. corporate profits forecasts at the fastest pace in more than a decade.
Many skeptical equity investors are not willing to call the end of the bull market, given that contrarians who challenged common market beliefs in 2017 missed the rally. However, this doesn’t necessarily mean there is no reason not to be worried.
From a valuation perspective, few can argue that stock valuations, particularly in the U.S. are overstretched, despite the upgraded earnings forecasts. When looking at the cyclically adjusted price to earnings multiple “CAPE” it is currently above 33, a level last seen during the dot-com bubble. However, this indicator has been suggesting that stocks are expensive for the past two years, but there are still no signs of the bulls giving up. This is due to the low-interest rate environment, which wasn’t the case in 2000 or 1929.
The 45% rally in the S&P 500 during the past two years has driven down dividend yields to below 1.9% which is now lower than the returns on 2-year treasury notes. At the moment it appears that investors are not too worried about rising short-term interest rates, but the outlook will likely change when yields in the longer term start to increase.
Get our Weekly Commitment of Traders Report: - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.
Get Our Free Metatrader 4 Indicators - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter
Today the Bank of Japan announced a reduction of buying JGBs by 20 billion yen. Although it’s considered a slight tweak in monetary policy, this may mean that further tightening is on the cards, despite BoJ’s Kuroda signaling at December’s meeting that no monetary policy tightening was imminent.
I expect to see further actions from major central banks to tighten policy through reducing stimulus and raising interest rates, as low inflation will not last forever. Such actions will likely lead to rapid appreciation in bond yields across Europe and the U.S. which could be the first signal of an equity market correction.
Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.
Article by ForexTime
ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com