A Fundamental and Structural Review of S&P 500 at Record Highs
- The S&P 500, Dow and Nasdaq closed at record highs simultaneously for the first time since 1999
- While market benchmarks are stretched to record highs, many fundamental metrics don't back such rich levels
- Value, participation and liquidity may be overlooked for a while, but they cannot be ignored permanently
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Sentiment doesn't need to be grounded in traditional fundamentals. The record highs that the US equity indexes have forged marked this past session - not to mention the heights these and other sentiment measures have maintained over the past year - are testament to that. However, gravity eventually wins out. Speculative reach and central bank reassurance can only encourage so much lift. Should one of the atypical market drivers exhaust itself, the system's foundation will be put to the test. And, the structure doesn't look particularly robust.
For customary fundamental analysis, both global GDP and corporate earnings have fallen well behind the incredible march higher in the capital markets' benchmarks. In the background, participation has faded between vanishing volume and a shift in dominance for the short-term trader over the long-term value investor. Now, participation and activity are bound, but circumstances insinuate that the masses are more likely drawn back due to a collapse rather than a grudging crawl higher. And, should the markets experience a true push to deliver; the financial system may be taxed.
Looking at the financial stress measures for the Global markets (BofA), US (Cleveland Fed), Europe (ECB) and Japan (Westpac); there is certainly more pressure than record high equity indexes would insinuate. However, the true risk comes through the stability of liquidity. It is difficult to measure this crucial functionality of the financial system until it is actually under pressure. That said, during such unfavorable tides; exposure, volume and fundamental value become paramount. And, that is what we are lacking for as speculative appetite stretches to record highs. We celebrate new highs with a balanced evaluation in today's Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.