Be Careful, The Day of Reckoning Nears
December 6th, 2013
ANALYST: ‘Stocks Look More Vulnerable Than Ever’
In a note to clients this afternoon, Eric Green, global head of rates, FX, and commodities research at TD Securities, warns that “stocks look more vulnerable than ever,” as prices have outrun improvements in fundamentals.
A prevailing view among many has been that the portfolio substitution effect of QE inflated risk assets such as equities beyond reason. When the Fed began talking about tapering, however, there was no evidence that stocks were overvalued. Narrow profits as a percentage of gross value added were very much consistent with stocks priced in the 1550 range. However, since that time the S&P 500 has risen almost 11% after trading sideways between May and early September. Indeed the leg up from 1650 after the no tapering decision in September has not been supported by underlying growth and earnings fundamentals. Part of this may be attributed to a ‘low for longer’ theme that has gained more traction relative to the lead up to the September meeting.