As of Tuesday the benchmark US index sits around 0.7% below its September record high, up roughly 24% since its most recent low on Christmas Eve.
A 20% growth from a 52-week low is often used to classify the beginning of a bull market, but few equity investors sound confident that stocks are set to keep climbing.
UBS Asset Management wrote in a note today that the “rally has been underpinned by dovish central banks and a sharp decline in global real rates.”
A senior investor at a large global asset manager also said that the rally appeared to be driven by central bank policy and an ease in trade war tensions.
In this environment most investors speaking to GlobalCapital express the view that stocks remain fundamentally expensive.
The Schiller P/E index, often used to track the fundamental value of S&P 500 stocks, is above 31, just below the levels of last October, before equity markets aggressively sold off.
Stock valuations were used as a selling rationale by some investors last October, and while they were perhaps oversold in the depths of Q4, they are almost back at those levels again.
Equity capital markets investors have noticed this and despite the ‘rally’ have exercised enormous price discipline in IPOs so far in 2019.
Italian payments firm Nexi, for example which priced just above the bottom of its initial price range, has still fallen in trading on its first day.
Nexi was deemed by many investors to be fundamentally expensive on pure price to earnings, or Ebitda to enterprise value, basis despite the argument that it presented strong relative value compared with other listed payment companies.
Because it was deemed to be dear, some investors did not buy at IPO and many of those that did sold on the first day.
Sources have speculated that these sellers likely got more at IPO than they actually wanted, but it shows a worrying lack of conviction in the price of a stock that they were happy to buy last Friday as a long-term play.
The market is not therefore bullish, but it also is not bearish.
Investors are operating in a sort of limbo where stocks are expensive on an absolute basis and there is deemed to be less underlying value in the market than there was earlier in the cycle.
But, because central banks remain dovish, and volatility has subsided they are continuing to invest.
IPO sellers need to be careful of misdiagnosing the first four months of 2019 as a return to days of irrational exuberance.
Equity markets in 2019 are not firm bulls or bears but are fluid. But sentiment remains fragile after the brutality of last autumn’s sell off and near continuous equity outflows, at least in Europe.
This means IPOs and block trades deemed to be fundamentally too expensive could still be punished in trading — or not get done at all.