Wednesday, May 7, 2014

Financial Comment - Are markets really "over-valued"

Market Bears are Making ‘Predictions’ Again

About a month ago, we wrote in a blog that, after a 2.6% growth in the 4Q/2013, analyst estimates were that the U.S. GDP could have grown by up to 2% in 1Q/2014. The reality appeared to be much worse. In late April, the U.S. Bureau of Economic Analysis issued an advance estimate that the GDP actually grew by just 0.1%.

This estimate may be revised upwards later, however, these weak results are giving some ground to a new wave of disappointing expectations about global economic and market growth. According to Yahoo Finance, such observers as Jeremy Grantham, Marc Faber and Nouriel Roubini, who are well-known for their pessimistic stance about the economy and markets, have recently intensified their predictions of a soon-to-happen global economic downturn.

Usually, economic and market pessimists abstain from providing any timing on their predictions of economic or market deterioration. This is a convenient position which such prognosticators hope is difficult to prove wrong: as long as the economy and markets grow, these predictions are considered possible, yet whenever the markets do turn down, which is an inevitable reality, these prognosticators are quick to announce how ‘accurate’ they were.

This time, Jeremy Grantham, fund manager at a global investment management firm GMO, made a specific call about when the market bubble will burst (per He believes that the American stock market is already overpriced and that the Fed has already pumped too much liquidity into the economy, but expects that the market bubble will burst around or after the 2016 U.S. presidential elections.

That’s more than a 2 year time frame, which if realized, would make the current bull market, starting from the lows of March 2009, seven and a half years old. Although the media may run with such stories, we’ll wait for the hard economic evidence before we believe that markets are overvalued and heading towards a correction. Weak GDP growth is only one of several indicators that a market downturn is on the horizon. Other indicators need to be aligned as well, including an inverted yield curve (which currently is quite steep, indicating continued market strength), higher capital spending (not yet evident), unemployment at or below 5% (still above 6% in the U.S.), and price pressures forcing a series of interest rate hikes (the first rate hike is anticipated in late 2015).

By: Ukrainian Credit Union Limited

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