Us Equities And Irrational Expectations. The Recent Behaviour

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US Equities and Irrational Expectations
The recent behaviour of US equities at such an advanced stage of an economic expansion should not be viewed as something unusual. There was a surge in stock prices in the late-1990s based on the ill-founded view that a supply-side improvement in the economy, founded on new information technology, would perpetually postpone the arrival of profit margin erosion. Investors consequently fell into the trap of believing that the benefits of technological revolution would be solely bestowed on the corporate sector, contrary to the experience of prior episodes where households had enjoyed the bulk of the benefits via lower selling prices. It comes, therefore, as no surprise that the bursting of the
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The key challenges facing equity investors are, therefore, to correctly forecast what will be passed by the new Administration and when. Currently, nobody has a clue, but equity investors have still priced in the full and undiluted implementation of the Trump agenda. Given the high levels of bullishness since the election, US equities are particularly vulnerable if policy implementation fails to meet expectations.
Will Disinflationary Forces Persist Longer Than Expected?
The aggressive sell-off in bonds since the Presidential Election is being viewed as a textbook reaction to the economic proposals of the new Administration. Bond investors are taking the bet that any lingering deflationary forces will be truly banished and inflation will start to rise again. Inflationary expectations over the next 5 and 10 years in the Treasury Inflation Protected Securities market have risen by roughly 20 basis points since the Presidential Election, but their current levels are not significantly higher than the Fed’s 2% long-term inflation target. These expectations currently suggest, therefore, that disinflation, while less prevalent, could still linger powerfully enough over the next decade to prevent price instability. Bond investors are also assuming that the Fed will undertake the necessary policy measures to keep inflationary expectations well-anchored. Meanwhile, the Fed will also be paying attention
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