Friday, 28 August 2015

Markets rally after stocks become cheaper

The Shanghai Composite Index jumped 5.3 percent on Thursday. Government buying was suspected to have been behind the rally.

The market rally in China helped shares gain elsewhere as well. In the US, the S&P 500 jumped 2.4 percent, capping a two-day gain of 6.4 percent, the best since the bull market began more than six years ago.

Some analysts think there could be more volatility ahead. JPMorgan Chase & Co. derivatives strategist Marko Kolanovic warned that “price insensitive” program traders are likely to cause repeated selloffs in coming days.

However, other analysts think the worst may be over.

“We got our pullback, and now we’re going to focus on U.S. things like GDP and the Fed,” said John Canally, chief economic strategist at LPL Financial Corp. in Boston. “When you’re in a correction, it’s not fun, but when you’re out, you can refocus on what matters.”

Lower prices could help stocks rally further.

Stocks are “screamingly attractive”, according to Tobias Levkovich, Citigroup’s chief US equity strategist.

Jonathan Golub, chief strategist at RBC Capital Markets LLC, told Bloomberg: “Those things that you probably liked before you should like now at cheaper prices.”

In any case, Laszlo Birinyi thinks that valuation metrics such as the cyclically adjusted price-earnings ratio championed by Robert Shiller have underestimated the perfomance of stocks. Rather, sentiment is as likely to drive prices as anything else.

“Our bottom line is that many market metrics and indicators are based on a cyclical environment which no longer exists,” he wrote in a note to clients on 5 August.

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