Having started the week in a positive mood, equity markets then slipped back. For a change, it was not worries over the Korean crisis, but US politics. But in such relaxed – or should that read complacent – times, the slip back was hardly a massive move.
The Trump presidency has now lost its chief strategist, communications director, chief of staff, press secretary and campaign manager – and we may as well throw in an FBI director, a national security adviser and an acting attorney general. Politics is not our job so, unlike some sections of the media, we will not sneer at his travails. But we do, like many others, question whether the delivery of an agenda planned to be a strong boost to the economy can be delivered in whole – or even in part?
So, how much did the expectation of such a boost support the US equity markets recent highs? Who knows. Equally, were the reality to be a lesser – or no – boost, then would that undermine valuations? Again, that is too speculative. What we do know is that a forward price/earnings of 17.7x puts the S&P 500 at historical highs. Goldman Sachs highlighted that the cyclically adjusted price/earnings, at 29.7x, is at “a level only reached twice in history – before Black Tuesday in 1929 and the bursting of the Dotcom bubble in 2000”. We do not see now this as a portent of doom – but it does reinforce our view that valuations are expensive.
Clearly, a re-ignition of the tension in Korea would rightly eclipse such political worries. We find ourselves in the same position as previous weeks. That of having one optimistic eye fixed firmly on solid economic data and a good set of second quarter reports in the recent earnings season, and of a more wary eye monitoring shorter term events that may shake things up a bit. Or even quite a lot.
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