Abet Chichi2

[DiscoverGold]

Staying Power Of The U.S. Equity Rally

* August 26, 2016

U.S. equities have soared higher, and are increasingly expensive: the underlying reward/risk tradeoff remains poor. That said, several of our indicators suggest that the high-risk rally is not over.



There are several reasons why the equity prices could continue to rally for a time:

For one, the Fed is sensitive to dollar strength. Officials have acknowledged that monetary ease in the rest of the world will impact U.S. interest rate decisions because a strong dollar would tighten U.S. monetary conditions. This increases the likelihood that European and Japanese monetary ease will benefit both U.S. equities and bonds.

Second, deflation tail risks in remission: Continued compression of emerging market sovereign and U.S. corporate bond spreads suggest easing abroad is keeping the tail risks that plagued equities in late 2015/early 2016 in remission.

Third, the Fed has room to “wait and see”: Subdued inflation pressures across the board are letting both Fed hawks and doves mark down their terminal rate, or resting spot for the Federal funds rate.

Finally, early-warning indicators not flashing warning signs: Investment bank share prices are rising, both in absolute terms and relative to the S&P 500. Market breadth is improving, judging from the ratio of the equal-weighted Value Line Index to the market cap-weighted S&P 500. Junk bond yields continue to decline in absolute terms and vis-à-vis Treasury yields. In previous cycles, junk bonds have tended to lead equity prices.

http://blog.bcaresearch.com/staying-power-of-the-u-s-equity-rally

• DiscoverGold

Click on "In reply to", for Authors past commentaries.