MARKETS SPECTATOR: Governor gee-up

Glenn Stevens may be waving a red flag at the stock market bulls. The Reserve Bank governor may have sought to bolster hopes that recent rate cuts may increase earnings while hinting if the economy does not respond to monetary policy easing, the benchmark cash rate may be clipped.

“There are a number of indications that the substantial easing of monetary policy during late 2011 and 2012 is having an expansionary effect on the economy,” Stevens said in his statement today. “With growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate.”

Stevens’ comments may be terrific news for those with long positions in the market. Some may be getting nervous that with 14 times 2013 projected earnings the S&P/ASX 200 Index may be close to a top when compared with its long-term average of 14.4 times.

But just as central bankers are supposed to 'take away the punch bowl just as the party gets going' they are also makers of the punch; seeking through a combination of blunt monetary policy tools and judicious use of the bully pulpit a brew that will quicken or moderate the pulses of investors.

The S&P/ASX 200 Index may have gained 15 per cent in the past 12 months. But it has slid 2.3 per cent in the last month and some, such as Matt Sherwood at Perpetual, believe the market may have already experienced the bulk of its gains.

Sherwood points out that in 2012 share prices rose while earnings fell; just as they did in 1975, 1982, 1991, 2001 and 2008.

He warns that stock prices have not yet risen in two consecutive years when earnings have slipped. And Sherwood doesn’t expect overall earnings for Australian publicly-traded companies to rise this year.

That, if nothing else, may doom Glenn Stevens’ cheerleading efforts; at least as far as the stock market is concerned.