Equity Markets Are Witnessing A Rally Now. Is It Driven By Fundamentals?

Markets in the US have touched June highs since 2008, and the Dow is flirting with 13,000. Is the equity market witnessing a bull run, particularly since the start of this year? Or is the market overpriced and a pullback is imminent?

The S&P is up eight percent year-to-date and nearly 25 percent since October 2011 lows. Some of the emerging markets have recovered spectacularly and are up more than 20 percent year-to-date.

If Saira Malik, Head of Global Equity Research at TIAA-CREF, a large teacher’s retirement fund, is to be believed, the Dow is now fairly valued. The recent rally has been caused by a combination of both local and global events such as stronger manufacturing in the US, the ECB’s LTRO initiative, better investor confidence in Germany and better business surveys in China.

However, investors should cut their risk exposures to moderate levels since energy prices have shot up recently. This will affect consumer spending and profitability of companies and it has already reflected in the forward looking earnings estimates of the S&P, which has dipped to 9 percent from 11 percent.

The utilities, which tend to do well during slowdowns, have done well in the last four months. Investors can target them for better dividend yields unless markets turn extremely negative. Currently trading at 14X of forward-earnings, the S&P is fairly valued now since historically it has traded in the 12X to 18X range in the last five years.

The liquidity enhancing measures taken by the Fed in the US, by the ECB in Europe, by the BoE in England, and by the BoJ in Japan, will ensure that the markets remain well funded in near future. You can watch the full interview here.

Whether these measures will have the desired long-term positive effect remains to be seen. I view them merely as desperate band aid approaches, since the real underlying issue of too much debt anywhere you look, has not been addressed.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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