The core driver of stocks in the latest rally? -- In my opinion, a move down in the still too high Equity Risk Premium. The S&P 500 Equity Risk Premium moved from around 6% three months ago, to about 5.3% now.
Internals in this rally are instructive:
I took a look at a Forward 12-month Price/Earnings ratio chart this morning. It showed stock valuations stretched towards a 14 level on the S&P 500 Index in the latest rally. Still pretty low historically.
Consumer Discretionary and Consumer Staples are near one another at around a 16 P/E. In the latest rally, Discretionary valuations moved ahead of Staples. Consumer stocks are the growth areas of the economy and are priced as such.
With its relatively high free cash flow yield, investor’s search for safety pushed up Telcos valuation. However, these defensive stock forward P/E valuations came down of late. They are still the highest though.
Financials are still the worst in terms of forward P/E ratios. However, these stocks valuation multiples are among the highest accelerators in the latest rally. Less fear in financials helps.
Since lowering fear and adding risk is the story of rising S&P 500 stocks, the question I have is this.
First, what LOWER RISK is taking stocks up the MOST?
(A) A lower risk of a "Fiscal Cliff" meltdown
(B) A lower risk of a China Hard Landing.
(C) A lower risk of a European Financial/Debt Crisis.
(D) A lower risk of a U.S. recession.
Second, what is the most likely fear factor to REVERSE matters this year?