It is a sign of the times that investors view improving economic fundamentals with trepidation.

Recent US data prints on GDP and employment, which came out ahead of consensus, caused widespread soul-searching whether these could trigger the dreaded ‘taper.’

By the same token, Janet Yellen’s statements before the Senate Banking Committee that the economy had not recovered enough to justify a rollback of QE led to fresh gains on Wall Street. At last week’s close the DJIA was perched at 15961.70, its 38th new, all-time high.

The Fed’s dollar printfest

Stocks are obviously bobbing along on a flood of Fed-induced liquidity and any threat of the spigot being turned off affects sentiment negatively. A WSJ article last week carried this quote from Jack Ablin, CIO at BMO Private Bank, which has $66B under management: “We do believe the market is probably more than 10% overvalued right now. But that said, it would appear that we have accelerating economy, enormous liquidity and favorable momentum.”

US equities doing fine on valuation and earnings

But Citi’s PULSE, a five-point barometer of outlook on US equities, says the market is positively situated with respect to Price (‘P’) and Earnings (‘E’) while Unanticipated (‘U’), Liquidity (‘L’) and Sentiment (‘S’) remain Neutral or Mixed:

us equities pulse map

“The market still appears undervalued based on a normalized earnings yield gap analysis and other metrics,” say Citi analysts Tobias Levkovich, Lorraine Scmitt and Christina Wood in their PULSE report titled “Liquidity Still Trumping Sentiment.”

Money in circulation

However, on Liquidity (‘L’) they point out that M2, an economic measure of the amount of money in circulation, fell last week on a sequential basis. Measured on the basis of the annualized sequential change of its four-week average, M2 fell to 5.16% from 11.81% in the previous week.

On the other hand, equity fund inflows continued to be robust and investors pumped in $9.04B during the week ended November 6.

2-moneyflows

Bond funds continued to be shunned by investors and saw redemptions of $4.34B.