Explaining the Inexplicable

Abstract

As we step into the second half of 2017 the bears continue to hibernate despite a persistent drumbeat by market Cassandras outside the cave. High valuations have not abated in the US equity markets, even as the new Administration’s pro-business platform remains stubbornly jammed in low gear with a plethora of distractions – some glaringly insignificant and others gravely important – acting to impede progress. Neverthelesss, valuation multiples hover well above long-term averages in expectation of fiscal expansion coupled with tax and regulatory relief. At the same time, corporate earnings have improved and systemically important banking institutions have passed stability tests, while the Fed has provided strong support via low interest rates and accommodation in the form of asset purchases. In the Eurozone and Japan, strengthening fundamentals are also underpinned by Quantitative Easing (QE) from monetary authorities, yet the central banks are now starting to ponder a post-QE world.