Well, the markets have slowly climbed the Wall of Worry and increased the valuation to 14.1 times 2012 earnings and 12.5 2103 earnings due to historically low trading volumes and few buyers around the markets. The average is around 15 times earnings. The markets are not expensive, nor are they cheap.
This has been one of the lowest volatility quarters in our memory. We see volatility picking up because China is not doing well, Europe has a number of issues to resolve including their current recession, 10yr bond yields are very low, there is very little employment growth and the markets are starting to price in QE3 based on what Bernanke says on Thursday.
What does this all mean? If Bernanke positions himself for another QE3 the markets traditionally go up. If he says there is no need, then the markets will come off. If there is another QE3, natural resource based economies i.e. Canada, Australia, etc.. will do well vs. the US dollar.
We believe that the markets might get a short term bump up, but then reality will set in and market valuations will settle down. The elections, valuations and whatever the media throws at us will impact market volatility, but the bottom line: bond and equity markets are a great predictors. They are saying slow growth.
