The U.S. stock market remains in a three-and-a-half year bull market. At the same time, the credit markets have also rallied, pushing interest rates to historic lows. These markets are clearly extended but that does not mean they are mispriced. We continue to believe that there is further upside potential in the stock market looking into next year. However, the stock market could fluctuate around current levels during the next few months as investors await the outcome of the election and the upcoming potential fiscal cliff.
-Gary Thayer, chief macro strategist, Wells Fargo
After extended moves in the financial markets,
investors may be worried that stocks and bonds
are overpriced. Fortunately, many of the indicators
that would signal excess valuations do not appear
to exist at this time. In particular, investors are not
overly confident as they often are when markets
are mispriced and there are asset bubbles.
The Federal Reserve has been pumping liquidity
into the U.S. economy since the financial crisis
occurred four years ago. With all this excess
liquidity, the stock market has been able to
recover most of its losses during the 2008-2009
bear market. Now that the stock market is close to
five-year highs, it may be worthwhile to review
why the market is probably not overpriced even
after a three-and-a-half year bull market.