The main reason why the US Federal Reserve decided not to start tapering asset purchases at its last meeting was that the central bank considered the US economy to be still too fragile. The stock market nevertheless reacted with euphoria, jumping to new record levels.
The two facts are not easy to reconcile. The stock market rally should mean that investors are bullish about the earnings of the major listed companies, which should happen only if the US economy is on its way to a strong recovery, contrarily to the Fed’s forecast. If instead its view of the economy is correct, market prices are too high and are likely to be reversed downwards. In any case, asset prices do not seem to be in line with the central bank’s view of the US economy’s underlying fundamentals. Continue reading »