Are Equities Over Priced?

Global equities have hit new all-time highs with the S&P 500 reaching 2395 and the FTSE 100 now standing at 7349. The MSCI World Index rose to a record high after an 8 year bull market run. But should investors be nervous that the US runs out of growth?

The main driver for recent equity gains is the US economy. Trade policy, the strengthening US$, American consumer spending, Trump’s reflationary policies such as tax cuts and infrastructure spending are pushing up the market values of US stock and pulling the developed world up with them.

US interest rates are expected to rise again particularly after Janet Yellen hinted as such. The US is diverging from the rest of the world as it starts to return to post financial crisis normal economics. The rest of the developed world will continue with low interest rates and quantitative easing.

The so called ‘Trump Bump’ starting in November has resulted in several global indexes hitting new highs. There are concerns over issues like the ban on travellers from Muslim majority countries and senior staff resignations. However, investors have decided to concentrate on the business friendly policies of lower taxation and fiscal spending.

The inevitable strengthening of the US$ could be more problematic. Rising interest rates and a strong currency are usually bad for equities mainly to the servicing cost of debt and exports being uncompetitive abroad. However this in not holding markets back in the USA because of the underlying strength of the economy.

The Federal reserve are likely to tighten monetary policy at a steady pace and there will be a time when rate rises will start to impact equity market values but this is some time off.

While the Bull Run that started in 2009 has been going a long time by historical standards, this run is in part different from others. The rate of global GDP growth has been much slower than previous recovery cycles. Inevitably US growth will slow due to rising interest rates, inflation, border controls over new immigration and slowing consumer spending but we are not expecting this for several months.

It is certain that optimism over the global economy has improved since Donald Trump’s victory. Investors are seeing European political change as a bigger risk than a trade or tariff war triggered by the new President.

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