American Markets: “There Is an Over-Valuation Phenomenon”

The Dow Jones, the leading index of the Wall Street stock exchange, finished its session on Tuesday, Feb. 28 at 13,005 points — a first since May 2008.

Pierre Sabatier, strategist and president of the economic and financial research cabinet Primeview, estimates that the good health of American markets can be understood as the over-valuation of the actions and structural policies of the Federal Reserve (Fed).

While the majority of the big banks passed the 2012 stress test with success, the American market indexes reached levels that they have not known since the beginning of the crisis. Why such euphoria?

Actually, American markets are highly valued, located at 10 percent from their highest level before the 2007-2008 crisis — the most important crisis we have seen in 25 years. But even if the American economy is shaping up, the unemployment rate has decreased to 8.3 percent. The consumption of goods has maintained; the housing market has stabilized. This is not a sufficient condition to justify the recovery of the markets today. The markets are so high because the Federal Reserve (the central American bank, the Fed), the first lender of the state, is hyperactive in a new way to revive the economy. It injected liquidity by purchasing shares and by indirectly intervening in the markets. The result is that investors have savings channeled, and they therefore resume investing in equity markets and risky markets, which is not the case in Europe.

Why is there such a disparity between the American and European markets, which remain at levels far lower than those recorded before the crisis?

This gap can, in fact, be explained by the policy of systematic market support, whether at the monetary or budgetary level, set about by the United States, which accommodates investors — a policy which not does benefit European markets.

Today, European budgetary politics are particularly unfavorable to investors because all or nearly all of the participating countries are entering a phase of austerity and rigor. In the United States, it is completely the opposite: The supporting forces are marching at full speed to support the economy and, above all, the markets. This is why I would not speak of a delay in the valuation on the European side, since this term implies that we can recapture it, which I cannot be sure of.

Moreover, Washington will also have to end up dealing with its enormous budgetary deficit. This would begin during the course of the year and accelerate next year. Under these conditions, it will be necessary, rather, to wait to see whether European and American stocks converge toward European valuation levels.

Is the good health of American markets artificial?

I think it remains fragile. We are certainly observing an improvement in unemployment and the real economy in the United States, but at levels much lower than those from before the crisis. Meanwhile on the markets, the valuation of the stock market and financial assets are already higher than those before the crisis.

To me, there is an over-valuation phenomenon. First, the actions are overvalued because there is, quite simply, too much money in circulation with respect to what the health of the American economy justifies.

Second, this valuation is based on an excess of optimism with regard to the ability of households to continue to consume. In fact, in the United States, the cycle of household debt reduction has barely begun and will continue for at least a dozen years.

To fully implement this debt reduction, household goods will have to save, thus consuming less. As a consequence, there will be less turnover and less profits for enterprises, so the value of actions will decrease, and the overvaluation… disappears.