Willerequity North America p

Geneva, 6/06/2013 – Much of the discussion about the Federal Reserve’s exit from its quantitative easing policy mixes together two different steps: the transition to the exit and the exit, itself (winding down the balance sheet and raising interest rates). On the latter point, the Fed has been clear. In June 2011, the central bank laid out its general principles for “exiting” unconventional policy. The Fed will keep the near-zero funds rate “at least as long as the unemployment rate remains above 6.5% and as long as projected inflation is no more than 2.5%. It is the transition to the exit that has started to trigger nervousness in the equity market, as well as the bond market. Over the summer months, in the traditional low volume period, volatility is likely to creep in, but this should not be confused with a change in direction by the Federal Reserve. Investors should continue to monitor the developments in the US housing market for any major shift in domestic economic growth. The recovery in the housing market has been and continues to be a key player in the development of the overall US economy. The latest S&P Case Shiller home price report exceeded expectations, improving 16.7% qoq in the first quarter. This boosted the year-on-year growth to 10.2% and returned prices to mid-2003 levels. Any sudden increase in interest rates could put downwards pressure on the recovery, which in term would hamper economic growth, a result which would not be viewed favourable by the Fed.

Current consensus earnings forecast indicate a CAGR of 10.5% for the next 3 years. In terms of valuation, the S&P 500’s price/earnings ratio has climbed from 12X in September 2011 to 15.9X currently. However, the current PER is still at a slight discount to the historical median of 16.8X, dating back to 1955. The current discount seems reasonable given the continued intervention by the central bank. The valuation of the US equity market is not excessive compared to its historical tendency.

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