Wednesday, 14 December 2016

Stocks rise amid bullish sentiment as valuations hit highs

Markets rose on Tuesday.

The S&P 500 rose 0.7 percent to an all-time high, the STOXX Europe 600 rose 1.1 percent and the Nikkei 225 rose 0.5 percent.

US Treasuries were steady as the Federal Reserve began its monetary policy meeting while European bonds rose, with the Italian 10-year bond yield in particular falling 12 basis points to 1.87 percent.

The pause in the rise in bond yields may give stock investors some relief. While higher interest rates are usually thought to be bad for stocks, CNBC reported that according to LPL Financial's analysis of history, higher yields should not start affecting stock values until the 10-year note roughly doubles from its current value.

Indeed, Bespoke Investment Group reported on Monday that bets against the US stock market has declined significantly.

"With U.S. equity markets making new all-time highs post-election, sentiment has turned extremely bullish in the options market," wrote Mandy Xu, derivatives strategist at Credit Suisse, in a note on Monday.

However, this bullishness may be misplaced.

The Office of Financial Research reported on Tuesday in the US that stock valuations based on prices to earnings have reached the same high level that they hit before "the three largest equity market declines in the last century".

Investors are now vulnerable to "to heavy losses from even moderate increases in interest rates".

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