Oct. 15, 2013
U.S. equity markets looked overbought and expensive in mid to late September, but the subsequent declines felt labored and even somewhat reluctant. On October 9 the markets made a modest new low only to quickly reverse those declines and finish the session nearly unchanged, indicating an unwillingness to continue lower. The following day’s strong rally confirmed the impulse to advance, and at this point the market appears on a path to new highs.
Consistent with this idea would be a resumption of the Abenomics-fuelled rally in the Nikkei, a further selloff in the Yen and JGBs, and higher long-end Treasury yields as well. At risk of over-simplifying things, it feels like the broader “risk-on” tone is seeking to reestablish itself in the coming days and weeks. Government spending and central bank buying can tend to have that effect and that’s precisely what’s driving this move.
That said, additional upside in domestic equities may be limited and short-lived, as the economic outlook and overall market fundamentals seem unlikely to be able to support a meaningful long-term increase in valuations. Instead, after making modest new highs, I expect equities to once again decline.