The core driver of stocks in the latest rally? -- In my opinion, a move down in the still too high Equity Risk Premium.
The S&P 500 Equity Risk Premium moved from around 6% three months ago, to about 5.3% now.
Internals in this rally are instructive:
- I took a look at a Forward 12-month Price/Earnings ration chart this morning. It showed stock valuations have been stretched towards a 14 level on the S&P 500 Index in the latest rally. Still pretty low historically.
- Consumer Discretionary and Consumer Staples are near one another at around a 16 P/E. In the latest rally, Discretionary valuations moved ahead of Staples. Consumer stocks are the growth areas of the economy and are priced as such.
- With its relatively high free cash flow yield, investor’s search for safety pushed up Telcos valuation. However, these defensive stock forward P/E valuations came down of late. They are still the highest though.
- Financials are still the worst in terms of forward P/E ratios. However, these stocks valuation multiples are among the highest accelerators in the latest rally. Less fear in financials helps.
Since lowering fear and adding risk is the story of rising S&P 500 stocks, the question I have is this.
First, what LOWER RISK is taking stocks up the MOST?
(A) A lower risk of a "Fiscal Cliff" meltdown
(B) A lower risk of a China Hard Landing.
(C) A lower risk of a European Financial/Debt Crisis.
(D) A lower risk of a U.S. recession.
Second, what is the most likely fear factor to REVERSE matters this year?
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