Here is an update from Colin Twiggs.BIS: S&P 500 is "rigged"
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Analysis by the Bank for International Settlements suggests that Fed monetarypolicy accounts for roughly 50% of the S&P 500 rebound since the low inlate March 2020 and 20% of the Euro Stoxx 50. Blue lines show the likely pathof the index without intervention by the Fed and ECB.
"Stockmarkets price in long-term information, stretching far beyond the short-termcyclical fluctuation in the growth outlook. The recent rally in equity priceshas attracted attention, among other reasons, for its possible disconnect fromthe underlying prospects of economies still reeling from the pandemic shock. Inthis box, we use dividend derivatives to decompose the US and European equitybenchmarks into short- and long-term components, corresponding to the value ofthe short- and long-term dividend stream. Our main goal is to explore whetherthis dimension, together with depressed interest rates, sheds some light on theapparent disconnection. In line with the subdued short-term economic outlookmentioned above, we find that the short-term components of both indices haveseen a limited recovery since March. The benchmarks' strong recent performanceis thus predicated on steady gains in their long-term components. Moreover, thesegains are related, to a large extent, to the drop in the term structure ofinterest rates that followed the policy response of central banks to thepandemic shock." (BIS: The short and long end of equity prices during the pandemic,Fernando Avalos and Dora Xia)
S&P 500 Volatility remains high, with 21-dayVolatility forming a trough above 1%, warning of elevated risk. Pastoccurrences in the last 30 years have coincided with major market events,either a market reversal or disruption as in 1998, 2011 and 2015.
Conclusion
Stocks are over-priced and market risk is elevated.
Quote for the Week
Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed.
~ Benjamin Graham
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