At the time of going to press, the US equity market is
\na mere 1% away from all-time highs, implied
\nvolatility (VIX) is floundering close to all-time lows,
\nand the FOMC is meeting. The monetary policy
\ncommittee is set to confirm the rate hike that was
\nclearly announced to the market before the two-week
\nblackout. <\/p>\n
The Fed\u2019s about-turn may have come as a
\nsurprise: the February meeting left some doubts
\nhanging in the air, but most committee participants
\nhammered home the message over the space of
\nseveral days that a rate hike in March was inevitable,
\ndespite the lack of economic statistics liable to shift
\nthe Fed\u2019s core scenario in one direction or another.
\nThe FOMC may feel obliged to take a hard line in
\norder to stem the \u201cirrational exuberance\u201d, as
\nGreenspan would have called it, which seems to be
\nemerging on risky asset markets (equity, credit).<\/p>\n
Valuations on the S&P 500 are indeed moving further
\naway from historical levels, particularly since Donald
\nTrump\u2019s election triggered greater confidence. The
\nprice to book ratio stands at 3.2x for the S&P 500,
\nwhich is the highest in 13 years and twice the
\nequivalent multiple on the Eurostoxx 300. <\/p>\n
Admittedly, the US market has traditionally traded at Lastly, we can object The risk This projection looks ambitious when we remember that As shown byThe
\nforward P\/E multiple (Price to Earnings) is more than
\n18x for the MSCI US vs. 14.2x in the Eurozone and
\n13.3x in emergings: we have restated these figures
\nto remove sector bias resulting from the differing
\nindex compositions (commodities overrepresented in
\nemergings, and financials overrepresented in Europe
\nfor example).<\/quote><\/p>\n
\npricier levels than its emerging and European counterparts
\ndue to higher EPS growth (compared to Europe) and lower
\ncyclical and currency volatility (compared to emergings).
\nBut yet the major economic zones\u2019 position in their
\nrespective economic cycles would usually mean that the
\nvaluation differential should be lower than the historical
\naverage: we are observing broadly negative future
\nearnings revisions by analysts in the US, while revisions
\nare positive in Europe and Japan. <\/p>\n
\nthat these P\/E multiples are inflated by low long-term
\ninterest rates. The equity risk premium metric aims to
\neliminate this effect: it measures the additional returns
\nexpected from equities over sovereign bonds (in theory
\nexempt from any default risk). As the expected yield from
\nequities is deducted from earnings growth expected by
\nequity analysts, which itself is very inertial, this risk
\npremium is inherently cyclical (see chart page 3). <\/p>\n
\npremium therefore de facto reflects the market\u2019s longterm
\ndividend growth projections, which in theory are
\nequal to the economy\u2019s productivity growth. As shown by
\nthe correlation between the risk premium and productivity
\ntrend growth, the current 5.9% risk premium anticipates a
\nreturn to productivity gains at 3%, which is the level we
\nsaw during the dot com boom at the end of the 1990s.<\/p>\n
\nproductivity has plummeted to 0.5% since the crisis. The
\nmarket is taking a play on the possibility that the Trump
\nyears will be able to \u201cmake productivity great again\u201d; the
\nFed doesn\u2019t seem so sure.<\/p>\n","protected":false},"excerpt":{"rendered":"
\nthe correlation between the risk premium and productivity
\ntrend growth, the current 5.9% risk premium anticipates a
\nreturn to productivity gains at 3%, which is the level we
\nsaw during the dot com boom at the end of the 1990s.<\/p>\n","protected":false},"author":1,"featured_media":61775,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1480],"tags":[1809,1655,1651,2087,2068,1678],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/61777"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=61777"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/61777\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/61775"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=61777"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=61777"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=61777"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}