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The Real Reason Stocks Are Rising: Searching for Alpha for August 2016

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I don’t think the strength in equities has anything to do with fundamentals. There certainly isn’t a politician running for elected office that has the secret sauce for economic expansion or a profit rebound. Pure and simple, this market is running on momentum. 

And what choice do investors have? Bonds are in negative rate territory in many developed parts of the world. U.S. fixed income has followed the crowd lower, and although domestic paper is still yielding a positive number, 10-year Treasuries are paying less than 1.5%.

So, in a world where all assets are expensive, investors will tend to concentrate on the best alternative. And stocks are simply the best choice available. That explains the flows into U.S. and emerging market stocks.

The real question is rather momentum is all that’s needed to perpetuate this rally. In the short-term, the answer seems to be “yes.” Longer term, as long as earnings can stabilize, the current low yields will likely justify higher valuations. 

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