Well, it’s been another pretty wild week in financial markets (as well as on the basketball courts!).

In equity markets, we remain at all-time highs, and it’s mainly due to the same tech companies I have been highlighting for some time. There’s been a little broadening with some financials and industrials pulling their weight, but the high valuations need tech to deliver very strong earnings growth – so far they seem to be, with strong demand and growing profits. Equity markets seem to believe that the U.S. Federal Reserve (Fed) is done and the inflation fight is over, and certainly I don’t see a concern by the Fed on the equity market that Alan Greenspan once signaled with his concerns over “irrational exuberance.” But if the equity market sees only a “green light,” inflation and the jobs numbers are still more “yellow or red." I understand the Fed wanting to leave markets alone, but they ignore the stock market at their peril – the wealth effect may be welcome, but it will only be harder to cut if the rally continues. Continued equity appreciation could present a red light to the Fed. The S&P 500 excluding the Great Eight is at nearly nineteen times this year's estimated earnings, which is expensive and arguably priced to perfection. Ever higher earnings beats are needed to sustain this momentum, and, while consensus views for earnings growth are quite strong, there’s a risk that those forecasts are simply a function of what is needed to justify the valuation.

Finally, a word on international markets. The question is always, why leave the U.S. party when it’s so fun? Well, investors need some diversification, and I think this should come from owning international markets, and small-cap stocks – they can potentially provide good returns and help to diversify away from a U.S. mega-cap heavy portfolio. We still like Japan despite its recent run up, and though we think it might pause, the view is still positive. I like the continued focus on governance and shareholder value, yes, the huge balance sheet and the fiscal issues need to be resolved, but the Bank of Japan likely will move slowly. They may have ended their negative interest rate policy, but so mildly that I think the yen will remain pretty weak, so the equity market still has legs.

– David