HAS FED LOST CONTROL? PE RATIO EXPANDS WHILE FED TIGHTENS?

Stocks usually go up. What doesn’t usually happen is that stock valuations swell at the time the Federal Reserve raises interest rates?

But that’s what’s happening now!

New research from Bernstein highlights that rarity of tightening cycles that are accompanied by expanding price-earnings ratios in the S&P 500.

  • Since 1983, equity multiples have contracted by a median 11 percent the six times policy makers have launched protracted tightening cycles.
  • This time, while it’s still early, they’ve risen 7 percent.
  • Equity bulls don’t mind — P/E expansion has been the largest part of a rally that has added $2 trillion to U.S. share prices in 2017.
  • But the anomaly underlines a concern that has been voiced by central bankers here and abroad — that asset prices overheat even as prices in the economy sit still.