The Daily Prophet: Bull Market's Foundation Is Getting Stronger

Global stocks were headed for a small gain on Monday, keeping the MSCI All-Country World Index near a record high and putting it on track to deliver a rare gain of more than 20 percent for the year. Naturally, the debate is heating up over whether stocks are overvalued and due for a pullback or just reflect the underlying strength in the economy. Whatever side of the argument you take, it’s hard to deny that the fundamentals are looking very good for the bulls, judging by the so-called hard data that tracks actual economic output.

Bloomberg’s U.S. surprise index, which tracks how hard economic data perform relative to economists’ projections, was the highest in November since March 2013, according to Bloomberg News’ Matthew Boesler. The gauge includes essentially every major report except surveys of business or consumer sentiment. “Granted, equity multiples do not look cheap in absolute terms,” equity strategists at JPMorgan Chase wrote in a research note. “But relative to both bonds and to credit, we find equities continue to offer an almost 300 basis-point valuation gap, and this is just to get to the fair value.”

The Bank for International Settlements, often called the central bank for central banks, is out with a report saying equities look “frothy,” particularly in the U.S. Stock prices are above historical averages and U.S. companies may struggle to continue their pace of dividend growth, the BIS said in its quarterly review on Sunday. “Ultimately, the fate of nearly all asset classes appeared to hinge on the evolution of government bond yields,” the Basel, Switzerland-based institution said. “There is also significant uncertainty about the levels those yields will reach once monetary policies are normalized in the core jurisdictions.”

BOND TRADERS ARE CAUTIOUS
If the economic outlook is so strong, then how does one explain long-term bond yields? Even though they rose on Monday, they remain relatively subdued, with 10-year Treasury yields struggling to push much above 2.40 percent. Recall that at the beginning of the year, the median estimate of economists and strategists surveyed by Bloomberg news was for the yield to be closing in on 2.75 percent by now, and possibly even 3 percent as the Federal Reserve raised interest rates and began shrinking its balance sheet assets. Bond traders are naturally more cautious, and appear to be taking their cue from forecasts that fiscal stimulus, including Republican-backed tax cuts, will deliver only a modest boost to the U.S. economy in the next two years, with many economists also expecting a recession to start during that time, according to a new survey. Bloomberg News’ Andrew Mayeda reports that about half of economists say fiscal policy changes will augment U.S. growth by 0.2 to 0.39 percentage point in 2018, according to a survey of 51 forecasters by the National Association for Business Economics conducted Nov. 6-15. About one-fifth project a bigger gain and another fifth see no benefit to growth. “While tax reforms might be considered a huge political win for GOP lawmakers, $140 (billion) of stimulus a year will barely move the needle for the $19.5 trillion (U.S.) economy,” the rates strategist at BMO Capital Markets wrote in a research note.