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Stock market fall is a numbers game

Some basic numbers illustrate the rationale for the sharp loss in value in US stocks. Over the 4 years 2013 to 2017, the average blended forward PE valuation for the S&P 500 index was 16.1 times earnings. The average 10-year bond yield over the same period was 2.17%

Recently both the bond yield and stock market valuations rose in a situation suggesting something might give. The 10-year bond yield is now at 2.7% but the S&P forward PE remains above average at 16.75. It peaked recently at 18.5. There is a lot more to stock valuation than the simple relationship between the risk free bond yield and earnings yield on stocks. However, these numbers illustrate how vulnerable the market was to a pull back, once the tide of sentiment turned.

The local stock market will open sharply lower this morning but could outperform US markets if the current sell-off extends over coming weeks. At 15.9, the blended forward PE on the ASX 200 is above the 2013-17 average of 15.2. However, at 2.83% the 10-year bond yield is still below the 3.05% average that applied during that period

The upcoming profit-reporting season could also help the local market fall less than the US if the current sell-off extends

Oil fell last night while base metals were slightly firmer. This indicates that pressure on oil markets is largely about concerns over increasing shale oil supply rather than a general risk off move in commodities.

The Aussie Dollar, on the other hand has been a risk off casualty, falling heavily against major currencies. The market impact of major data releases today including retail sales, balance of trade and the RBA statement could be important in that context. Markets would be encouraged if retail sales data can provide further comfort that consumption has continued to recover from its late winter/early spring funk.

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