In the equity market, silly season is back with prices rising sharply even as earnings and earnings estimates decline. Anyone notice how U.S. homebuilder KB Home missed both its earnings and revenue targets? The forward P/E multiple has widened to 17.3x from 16.7x at the start of the year, which is a 5.7-per-cent yield and simply not enough to justify it over the level of risk-free rates, let alone what you can garner in the corporate bond market.
We saw no fewer than eight bear-market rallies in 2022 that caused the same sort of excitement we have on our hands right now and yet the overall market was still down almost 20 per cent for the year and the cyclical sectors were down more like 30 per cent . Bonds are fighting the Fed, that is for certain. The futures market does not see the funds rate going to five per cent and yet the Federal Open Market Committee is telling us we are going north of that number. Then again, the Fed told us this time last year that we would finish 2022 at 0.9 per cent and we ended up in the 4.25-4.5-per-cent range.