The S&P 500 has traded in a tight range for almost two months and remains within spitting distance of its all-time high. Although the market hasn’t budged much, economic data have deteriorated significantly.
This disconnect between equities and the economy stems from the Federal Reserve and other central banks’ easy-money policies, which have inflated asset prices. Recall that the stock market has sold off sharply whenever the central bank threatens to start normalizing monetary policy.
Even if central banks remain committed to keeping interest rates near zero or even in negative territory, their capacity to support stock prices appears limited. In particular, negative interest rates have inflicted significant harm on European banks.
Although the economy and markets don’t always move in lockstep over the short term, the S&P 500’s frothy valuation appears unsustainable against the current economic backdrop. The recent pullback in US equities may mark the start of this re-rating process.
Against this backdrop, we continue to emphasize the importance of maintaining exposure to the hedges that we’ve added to the Wealth Builders Portfolio this year.