The Market Isn’t Rallying, the Fear Premium Is Fading

The U.S. stock market isn’t rallying so much as the fear premium is slowly fading away. The net effect, of course, is the same: rising share prices. But bear in mind what’s going on under the hood; earnings estimates for 2013 are lower than they were several months ago. The Street currently expects the S&P 500 to earn about $112 this year. In April, it was close to $119.

So why are investors willing to pay more for less? Multiples are driven by sentiment, and the widespread fear that plagued the market is melting away. Let’s look at the performance of stocks versus bonds. From mid-2011 to mid-2012, bonds (especially secure U.S. Treasury bonds) soared. Stocks are only beginning to play catch up.

Remember last year how everyone was watching what was happening in the Spanish or Italian bond market? Not so anymore. The guys at Bespoke note that European spreads are near 52-week lows.

The Spanish and Italian stock markets are also rebounding after severe losses.

Junk bond spreads are plummeting.

As sentiment returns to normal, volatility is fading away as well.

Even gold, which had been a big winner for so long, hasn’t been able to make a new high in nearly 18 months.

Posted by Eddy Elfenbein on January 29th, 2013 at 10:56 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.