Iolcus Investments

Is the stock market -especially in the US- in high multiples? Are inflated wages and raw materials negatively influenced corporate profit margins? Are forward prices discounting an interest rate rise which has already started? Are oil and gas prices an implicit tax on consumer spending? Is China growth stalling? For all these questions affirmative answers are sensible and consistent with today’s economic reality. Therefore, a reduction of equity exposure as a tactical strategy would appear to be the logical response; at least until the beginning of the new year.

Not so fast. The critical issue remains that all the aforementioned legitimate concerns have been factored in the current stock market levels - the implied weakness in consumer spending resulting from raw material prices and stimulus tapering could cap the Fed’s action for rate raises; the politically weakened US admin could water down any corporate tax hike; corporate EPS growth was revised downward, leaving ample room for positive surprises; and last but not least, the ‘unloved” rally we’re actually witnessing (actually SP500 is 2% off its all-time highs) points to more future legs, due to the liquidity sloshing in the sidelines. So, these factors mean there is a good chance of a year-end rally.