Monday, 22 August 2016

US stocks at record highs but "cracks appearing"

Thanks in large part to central bank liquidity, stock markets have been rallying. The S&P 500 in particular have been hitting record highs recently.

With the rally, however, US stocks may have become overvalued.

Paul Lim at pointed out that the Shiller P/E climbed to 27.3 this month. The last time the Shiller P/E was above 27 was in October 2007, at the start of the last bear market

While overvalued markets do not necessarily presage a market downturn, Citigroup’s head of global credit strategy Matt King wrote in a note over the weekend that there are “some cracks appearing” in the market.

“Central bank liquidity no longer refreshes all the parts it used to,” he wrote. He foresees “ever tighter spreads; ever more hand-wringing over a stagnating global economy; ever greater dysfunction in markets”.

Allianz Chief Economic Adviser Mohamed El-Erian also thinks that monetary policy may be reaching its limits. He told CNBC last week: "We have relied excessively on central banks."

He said that the US government needs to craft structural reforms instead, otherwise there is a risk “we're going to take a turn where slow growth turns into recession”.

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