COMMENT – Is S&P500 exuberance rational or irrational?
There has been a lot of head scratching on the Teflon like behavior of the S&P500 this year and this scratching has only intensified after a series of record highs last week. It’s easy to gauge the level of uncertainty over how prices move by the number of explanations as to why the US equity market continues to move higher.
These explanations range from 1) a receding of pessimism over the global growth/inflation outlook; 2) more positive noises on US/China trade; 3) the yield curve moving back into positive territory; 4) an earnings season not as bad as feared; and 5) still strong buybacks that reduce market freefloat. They work against persistent concerns over an outlook that is increasingly seen as delivering a recession/downturn over an 12-18 month horizon.
You can pick a side but at the end of the day the price action speaks for itself and the winning side of the ledger is with those that are either long or have been buying deeper dips. Until or unless the nature of the price action changes it is not yet time to give up on the rally. Yes, we have shifted from the buy-the-dip days of 2017 when it was hard to find a session when prices moved down more than 1%.
We continue to draw parallels for the equity market with the insurance cuts of 1995/96 and the latest round of insurance cuts from the Fed that started in July. Back in 1995/96 the insurance cuts were delivered when the S&P500 was at record highs. Subsequently after delivering the last of the insurance cuts in Jan 1996 there were further gains on S&P500 such that they ultimately led the then Fed Chair Greenspan to utter those now infamous words “irrational exuberance” (see “COMMENT: Fed – Equities party likes its 1995/96”; July 4, 2019 nL8N24C261.
We still expect the rally to continue all the way to 3,500/50 into the Presidential election next year. /kl