Questioning the Effect of QE

The ECB will reduce their QE to 30 billion euro starting next year, and there are rumblings about the potential effect of central banks pulling back stimulus in 2018.  Unlike other investors, what is more of a dark cloud on the equity market is the high valuations relative to the growth rates. This overvaluation is conveniently rationalized by low interest rates, which is easily debunked when you compare the valuations of Europe and Japan versus the US.  If low interest rates are the reason for a higher multiple, then how come NIRP Europe and ZIRP Japan are priced cheaper in all valuation metrics compared to PIRP US? 

The light blue line is the S&P 500, the dark blue line is Eurostoxx 50.  Since March 9, 2015, when ECB QE started, the S&P has outperformed the Eurostoxx, 25.2% to 8.4%.  While the US was tapering and tightening, the ECB was pumping out 60 billion euro per month, and Europe still can't outperform the US.  So maybe QE isn't the end all, be all for the stock market. 

When investors can't understand why stocks are going up, the most convenient rationale is the expanding balance sheet of the global central banks.  Not many people question this belief, even though the divergence in US and European equity performance since ECB QE simply doesn't support the case. 

This brings me back to the current market.  Europe has been getting pummeled in November.  I guess there is no positive seasonality in that market.  The US has tried hard to ignore the scarecrow European market, going up on gap down opens for 2 straight sessions.  Today will market another day of a healthy gap down thanks to Europe.  Europe has usually been a good forecaster of future US performance, so this European weakness should foreshadow future weakness in the US. 

Perhaps the long awaited 3% correction comes after Thanksgiving, since the US doesn't like to selloff ahead of that festive time period.  So expect the market to stabilize soon, as Europe is approaching strong support levels in the Eurostoxx made post French election and late September, just above 3500.  S&P should stay above 2550, but be capped under 2600 till Thanksgiving. 

Sentiment wise, it feels a lot like fall of 2014, after the market V bottomed in mid October, and went straight up till end of November.  That was the last time I have seen this kind of exuberance and complacency for equities.  Investors spent much of 2013 and 2014 getting max exposure to equities, as the market complacency finally kicked in the internal greed algo.  Same as post November 2016.  I can picture a 2018 that will be an even uglier version of 2015, purely due to the extent of the overvaluation.  Remember, the higher they go, the harder they fall.