The Dow Jones index broke through the 20,000 mark for the first time yesterday, as markets continue to respond to the potentially stimulative economic policies of the new US President. The Dow Jones now stands at over three times the low it reached in March 2009, when it traded at a touch over 6,600 points.
The Shiller CAPE ratio, one of the most widely-used measures of valuation for the US stock market, currently stands at 28.46, its highest level for 15 years. However it’s worth noting that it has been as low as 4.78 (December 1920), and as high as 44.20 (December 1999).
Meanwhile bonds yields have been on the rise recently, as investors brace themselves for further US interest rate hikes and the potential for fiscal stimulus and increasing trade tariffs to fuel inflation. The US 10 year Treasury is now yielding 2.5%, compared to 1.6% six months ago. The UK 10 year gilt has gone from yielding 0.8% six months ago to 1.5% today.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown commented:
‘The Trump jump has propelled the Dow Jones to an unprecedented level, as investors pile into US stocks in anticipation of lower corporate taxes and more government spending. Meanwhile expectations of further interest rate rises in the US, and the potential for inflationary fiscal stimulus, has been putting upward pressure on bond yields in the last few months.
Stock indices in the US and UK may well be at or near record highs, however when the earnings generated by companies in these markets are factored in, stock valuations show neither the extreme pessimism of 2008, nor the irrational exuberance of 1999. This means they are trading somewhere in the middle of their range, so are neither exceptionally cheap or hideously expensive. In the short term the stock market could move in either direction, but for long term investors it still makes sense to keep a healthy slug of their portfolio in equities.
Meanwhile bonds have come under pressure of late, as it looks like the US central bank is in the mood to raise interest rates this year. However there have been many false dusks for the bond market, which has defied expectations since ultra-loose monetary policy was initiated all those years ago in response to the financial crisis. Central banks in the UK, Europe and Japan are still engaged in stimulative activity, and while the US Fed is starting to push in the opposite direction, it’s likely to err on the side of caution lest by raising rates too soon it damages the US economy, and propels an already strong dollar even further upwards. While the best days for the bond market may be behind us, there‘s no sign that interest rates are going to return to pre-crisis levels any time soon, which acts as an anchor on rising yields.’
(Source: Hargreaves Lansdown)
