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A turning-point? The overbearing deflationary theme in stocks is due a correction There are a number of theoretical ways for valuing stocks. One that appears most apt in the current circumstances is the discounted current value of future cashflows an investor will receive. The trouble is figuring the appropriate discount rate. There are, of course, the useful benchmarks like the yield curve for government debt. Twelve-month T-Bills yield 10.1% and the 5-year bond is touching 11.8%. Share prices declined more than 10% in the one year to mid-December 2016. Falling share prices indicate that investors expect future cashflows to be lower than previously forecast. That could be because they expect profits to fall or they are now demanding a higher return (discount rate) for owning shares. Expectation around the discount rate (company earnings growth or decline and risk premium for holding equity) may rapidly evolve in 2017, compared to last year. In the September quarter of 2016, corporate earnings were up 24%, momentum some analysts expect would carry to 2017. If earnings growth beats expectations, the discount rate will deserve reviewing. The risk premium is a little trickier to figure. Interest rate expectations have a bearing and so do the risks and returns from alternate asset classes. Best of luck figuring all that out!

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