Monday, July 15, 2013

Irrational Exuberance Again? (excerpt)

Last week late in the day on Wednesday, Fed Chairman Ben Bernanke answered several questions from the audience after presenting a speech. His response to one of them sent stock prices soaring on Thursday: “Highly accommodative monetary policy for the foreseeable future is what’s needed in the US economy.” The S&P 500 rose 1.4% on Thursday, and 3.0% last week. It is now up 6.8% since the recent low on June 24 to another new record high of 1680.

The S&P 500 remains among the world’s best-performing stock indexes this year. On Friday, the forward P/E of the S&P 500 rose to 14.3, almost matching the year’s high on May 21. It was 16.5 for the S&P 400 MidCaps, also just under the previous recent high. It was 17.7 for the S&P 600 SmallCaps. The current bull market’s highs for all three were recorded during 2009 or 2010: S&P 500 at 15.1 on October 14, 2009; S&P 400 at 17.3 on April 23, 2010; and S&P 600 at 18.9 on September 18, 2009.

The market’s reaction to Bernanke’s comment suggests that the Irrational Exuberance scenario is back in play. I still assign it a 30% probability. However, it is certainly looking more credible again now that the S&P 500, S&P 400, and S&P 600 are all at record highs. Valuation multiples remain rational, and record highs in forward earnings suggest that the fundamentals continue to support those valuations.

We may be in for another four years of this bull market if it doesn’t melt up over the rest of the year.

Today's Morning Briefing: World Tour. (1) Cleveland’s economy is healthy. (2) Detroit’s Greek tragedy. (3) Consensus: Earnings growth likely to be low. (4) Global growth remains subdued. (5) China’s growth slowing toward 6.5%? (6) Euro zone crawling along bottom of current recession. (7) Despite weak exports and fiscal drag, US economy remains resilient. (8) Federal outlays drop, while revenues soar. (9) Update on some submerging economies. (10) Back to melt-up? (More for subscribers.)

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