Tuesday, 19 November 2013

Dow and S&P hit new highs before falling, stocks could see more gains before serious bust

Stocks started the week positively, with Chinese stocks in particular surging on Monday. The Shanghai Composite Index rose 2.9 percent while the Hang Seng China Enterprises Index jumped 5.7 percent.

Stocks also did well in Europe, with the STOXX Europe 600 rising 0.5 percent on Monday.

The positive momentum was initially carried over to the US. The Dow Jones Industrial Average and the S&P 500 rose above 16,000 and 1,800 respectively for the first time early on Monday.

However, both US indices fell later in the day. The Dow ended up just 0.1 percent while the S&P 500 ended down 0.4 percent.

In the latest GMO quarterly letter, Ben Inker says that US stocks are already overvalued.

Our recent client conference saw the unveiling of our new forecast methodology for the U.S. stock market... On the new model, fair value for the S&P 500 is about 1100 and the expected return is -1.3% per year for the next seven years after inflation...

However, in the same letter, Jeremy Grantham says that stocks may see further gains in the coming year or two before falling.

My personal view is that the Greenspan-Bernanke regime of excessive stimulus, now administered by Yellen, will proceed as usual, and that the path of least resistance, for the market will be up. I believe that it would take a severe economic shock to outweigh the effect of the Fed’s relentless pushing of the market... My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up. And then we will have the third in the series of serious market busts since 1999...

Economic data on Monday shared a similar pattern to the stock market.

Reuters calculations from National Bureau of Statistics data on Monday showed that home prices in China rose 9.6 percent in October from a year earlier to hit record highs.

However, confidence among US homebuilders was unchanged in November. The National Association of Home Builders/Wells Fargo housing market index stayed at 54, the same as in the previous month.

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