It would not surprise me to see the market give back 10–15% over the coming weeks and months. Valuations are very full and the economic data is weakening. But something to watch is the bull-steepening of the 10-yr / 3-mth yield curve from inversions. Whilst not a great timing too – generally its ‘vector’ is correct. That’s a warning – despite the Fed cutting rates.
US 10-Year Yield
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Don’t Choke On Your TACOs
The market is betting Trump is all bluster and no action. The acronym “Trump Always Chickens Out” (TACO) is sure to piss the President off. Now, if the TACO trade is right, then Trump’s threats will lose their power as a negotiating tactic. Therefore, on the assumption Trump believes in protectionism – he may have to follow through on some of his rhetoric. Markets seem to think that won’t happen…
Equity Risk Premium Isn’t There
The S&P continues its impressive six week rally – up over 22% from its early April low of 4,835. At 5,916 – this represents a forward price to earnings (PE) ratio of ~22x – with earnings per share (EPS) expected to be ~ $270 this year. If we take the inverse of 22x – that gives us the market’s earnings yield; i.e., 4.56%. The question whether 4.56% represents a good risk/reward? There’s an easy way to answer that… let’s explore.