Conventional wisdom is something that investors generally should be wary of. Right now, the headlines repeat that “fear of missing out,” or FOMO, is driving the U.S. stock market to new highs. True enough but conventionally true. I don’t deny it and we said months ago in these very pages that FOMO might happen—and it is driving equity prices. However, it is not new and is already conventional wisdom.
I believe this rally is more about a potential falling equity risk premium, which should lead to a higher price/earnings (P/E) ratio. The new year is young, but since its start, one could argue that the incoming economic data points have been negative, with for example, a weak December manufacturing index from the Institute for Supply Management (ISM), coming at 47.2 vs and expected 49, and the lowest point since 2009’s 46.3. (More on this below.) Add to that some fierce, if temporary, geopolitical tension and yet the S&P 500 index has risen five of the first six days of 2020.
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