Wednesday, February 15, 2017

U.S. equity market rise feels perilous

It is both fascinating and frightening to watch the mind numbing rise of the U.S. equity markets of late.  Why?  The market feels fully valued and the uncertainty around the Trump administration's actions day by day is unsettling.  As said in a post last week, the sustainability of expected returns is a key component of stock valuation.  With so much that is up in the air at the moment, certainty on that metric seems difficult to gauge.

The concern here is that a correction will eventually occur, and that it will be ugly.  The possibility for something unexpected happening is always there, but it seems heightened now.  Once a downturn begins, it can become self-sustaining and irrational, aka a panic to get out by savers, pensioners, and unhedged fund managers.  Rebuilding after such an event is almost always tedious, and with 2008 still visible in the rear view mirror, a rebuild may be slow.  That would put pressure on the economy and consumer spending.  How an inexperienced President and his administration would react to this is worrisome.

On the positive front, Janet Yellen has been steady and straightforward over the last two days.  She has not been intimidated by some Trump inspired members of Congress who want the Federal Reserve to go silent and stop international contact while waiting for guidance from Trump.  That's not the way the Fed works, and she shows absolutely no sign of being intimidated.

In the midst of winter and an early dusk, more reassuring comments from market's smartest would be welcome.

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