Investors have every right to be nervous about the fate of the United States sharemarket which is "extremely valued" with indices hovering around dizzying heights.
That concern is further fuelled by the inflation outlook. While falling interest rates have been partly responsible for the on-going market rally there are signs they have bottomed and may start to rise.
Just that happened last week when the US Federal Reserve raised the cash rate 0.25 per cent.
Tower Asset Management chief executive Paul Bevin says most corrections are preceded by rising bond yields and the S&P 500 having an unusually low earning yield relative to bond yield.
He says there is little room for further interest rates fall, and the gap between the S&P 500's earning yield and the bond yield is at its widest gap in seven years.
In his view rising yields are a threat to global equities.
One argument widely promoted is that traditional market valuation methods are inappropriate now that inflation is dead.
Bevin's view is that inflation is dormant, rather than extinct, and there is a high risk US inflation will jump. He says it has remained subdued due to low commodity import prices (thanks largely to the Asian crisis), lower energy prices and reduced growth in fringe benefit costs.
However, he says all is not doom and gloom and there is value in expensive markets.
The US has a stable and positive economic environment, and there are high levels of innovation.
Tower currently favours value stocks, mid cap companies and cyclicals. It is underweight in large cap growth stocks, financials, telecoms and energy.
Bevin's message is this: "Prefer the tortoise to the hare: beware the bear".
