Are things actually looking up? If your measure is the equity market… you would say absolutely. Stocks continue to charge higher on the back of lower inflation and optimism the Fed is closer to the end of its hiking cycle. What’s not to like? However, there’s something else giving markets a boost. Easy money! Financial conditions are as easy as they’ve been all year. For example, it was only 4 months ago and we had a mini banking crisis… where funding was a lot tighter. That’s now a distant memory.
Stocks Are Not Cheap
The S&P 500 has had a fantastic first 6 months of the year – up almost 15%. That’s a welcomed relief from the miserable 2022. But are stocks now too expensive? What’s the premium investors are being asked to pay? There are a couple of ways we can assess this. For example, we can compare the earnings yield against the risk free rate of return (currently around 5.5% and going up). And whilst it’s always good to maintain some (long) exposure to the market – we need think carefully about how much (and where)
Could $1.1 Trillion in ‘T-Bills’ Suck Out Liquidity?
Over the weekend, financial media reported a deal in principle to raise the debt ceiling. Based on all reports, the deal sets a two-year spending cap, kicking in October 1. Now if Washington DC agrees to at least slow its spending – they’re likely to be doing it during an economic slowdown. And this could have a near-term impact on economic growth and the valuations of risk assets. What’s more, if Treasury are permitted to issue $1.1 Trillion in fresh T-bills – what will that do to liquidity? Will banks deposits start looking for a (higher return) home?
If the Apple Falls from the Tree… Does the Tree Fall?
Apple managed to beat very low expectations. However, revenue fell for the second consecutive quarter. Nonetheless, the stock was slightly higher on the news. Consider it a safety trade. More broadly, stocks fell today as they wrestled with the threat of more regional bank failures and a committed Fed. Here’s my basic question: will we see three rate cuts before the end of the year? My view is we won’t see a single cut (let alone three). If I’m right (and I may not be) – there will be a painful adjustment in the market.
For a full list of posts from 2017…