The nervousness in the market is not about overvaluation or excess flow into equities. Valuations are not expensive and the flow is on the side of equities. The real concern is regarding the uncertainty and the magnitude of the US Central Bank’s tapering announcement (expected later this month) and what diminished Central Bank support will do to asset prices. Will it lead to another big bond sell-off, sending interest rates spiking? This has the ability to disrupt the equity market and send the S&P 500 Index (SPX) towards the 1500 level. I expect the US jobs report this Friday to beat market expectations and the Fed to embark on a moderate $20 billion of tapering. Therefore, we will see the SPX reach 1600 post the tapering announcement, and perhaps lower if the Syria conflict gets messy. In my view, a bond sell-off coupled with the SPX hitting 1500 seems extremely unlikely. The Eurozone is out of recession and data out this week indicate a return to economic growth that is broad-based and not just Germanyspecific. China has not entered a slowdown as was anticipated. The problem in Emerging Markets (EM) could get worse, but a re-run of 1997 is unlikely given changed domestic structures – no USD currency pegs, more local currency debt and high FX reserves.
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