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Chief economist update: Amber alert

If there's one thing that matches (well, nearly) the exponential rate of infection from the coronavirus, it's the vertigo-inducing rally on Wall Street.

After dropping to three-year lows in March last year, US equities have rocketed higher and higher to new highs. The S&P 500 index has risen by 75.8% to date from the pandemic-induced sell-off last March. The DJIA's up 69.2% over the same period with the Nasdaq composite index and the Russell 2000 rocketing by 104.8% and 128.4%, respectively.

Can't blame 'em. After all they're just responding to the all things bright and wonderful narratives: rates of coronavirus infections across the globe have been easing plus, there's the vaccine roll-out; US and international economic activity has rebounded from the deep freeze of 2020; there's easy from the Fed and more money coming from US President Biden's US$1.9 trillion contra-virus proposal.

Not to mention (again), the psychological fear of missing out (FOMO) and TINA (there is no alternative) to higher yielding stocks.

However, all these "euphoria" have taken the US equity market to overvalued levels. The S&P 500's P/E ratio currently stands at 22.5 times earnings which is way past its periodic averages - five-year (17.9 times); 10-year (15.9 times); 15-year (15.2 times); long-term (14.4 times).

A little bit more and the S&P 500 P/E ratio would hit the peak overvaluation of 23.4 times recorded on the 1st of September 2000 in the midst of the dotcom bubble.

We all know what happened thereafter.

It could be that this time is different. But there's also Murphy's Law.

The recent rise in 10-year US Treasury bond yields - up to a one-year high of 1.31% -- serves as a yellow light -- an amber alert -- to the equity markets.

But so far, investors appear to be heeding the quote from the 1984 hit movie Starman.

"Red light stop, green light go, yellow light go very fast."

Read our full COVID-19 news coverage and analysis here.

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