Can the stock market significantly advance with bond yields going higher? That’s what investors are trying to gauge. As governments around the world look increase their (already high) levels of borrowing and spending — it’s plausible bond yields are set to rise further. And it’s not hard to explain why… demand is falling as supply increases. But at what point does the stock market say enough?
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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.
Market Sweats Trump Tweets Over Powell
What matters more to the market: (a) a Trump tweet on any potential trade deal; or (b) Jay Powell’s statement on monetary policy? If you ask me it’s the former. Today’s statement from the Fed was almost a non-event for the market. Powell maintained rates in the 4.25% to 4.50% target range (which was expected). However he told the market that the risk of “higher unemployment and higher inflation” have risen since their last meeting. That’s problematic…