The recovery of the past two months has seen the S&P 500 index rise about 15% from its June low. However, as attractive as this recovery has been, the Global Investment Committee of Morgan Stanley Remains Convinced It’s Nothing More Than a Bear Market Recovery.
It’s not unusual for stocks to rally during a bear market
“Recoveries have occurred in almost every bear market of the last 95 years, with gains of 18% on average before the decline resumes. By comparison, the current recovery has gained 15% so far. That may seem like a bull market that is gathering steam, but given the historical context, we may not be out of the woods yet.”
Bond and currency markets anticipate further rate hikes
“As stock investors continue to expect the Fed to backtrack on its rate-hike program soon, Fed funds futures suggest the central bank will keep raising rates for longer. Currencies seem to agree, as the US dollar remains near the 20-year highs it hit recently.”
Stocks look expensive
“Stocks have inflated again, with the market forward price/earnings ratio now at 18.7. Meanwhile, the equity risk premium is hovering around 2.6 percentage points. That’s about a whole point less than the 13-year average.These valuation issues would not be as worrisome were it not for the fact that current prices appear to be based on unrealistic earnings estimates.Although US consumers continue to spend and the labor market remains strong, leading economic indicators suggest a slowdown in growth that may call into question earnings estimates.”
Source: Fx Street
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