Stockmarkets and other global risky asset markets may not be overvalued because of a “structural decline in real interest rates which is likely to endure”, says Capital Economics.
In a major report of developed and emerging markets, the London-based economists said real interest rates were the key to understanding that investors’ exuberance was “rational” after all.
“Admittedly, we think that the upside for risky assets is limited and that a pullback is likely in some cases. But a big cyclical correction is unlikely before 2019, when the US economy may be faltering,” the economists said.
They believe global growth will remain resilient, inflation will stay “very low”, but think the Federal Reserve will raise interest rates at a faster pace than many believe.
Moreover, they find “little evidence of a bubble” in US technology stocks and believe overall developed stockmarkets will not face the risk of sharp falls until 2019.
Others are not so sure.
The longer the stockmarket goes up, the more clients of Alliance Bernstein ask when it will go down. That’s according to Dianne Lob, senior managing director for equities, who says questions about the timing of the next 5% or 10% decline in the S&P 500 outnumber other inquiries at the US brokerage.
Going by history, it’s certainly been a while since anything bad happened in the US market. An AB study shows that while 5% declines have occurred on average every 10 weeks since 1928, you have to go back 56 to find the last one. Ten-percent corrections usually happen every 33 weeks, against more than 75 today. Bear market drops of 20% occur every 127 weeks. The last one of those came in early 2009.
The market is in “a bit of an odd and abnormal period,” with low-interest rates and stronger-than-anticipated company earnings, according to Ms Lob. It’s possible geopolitical issues will trigger something negative, she says, though investors are by now “pretty immune” to what’s happening at President Donald Trump’s White House.
Some hope remains he will pass a tax cut, particularly if Republicans offer a “sensible” bill, she said. For now, investors are happy to let earnings do the heavy lifting in the stockmarket.
About two weeks into the earnings-reporting season, profits are up 10.6% in the S&P 500 and sales are rising at a 5.5%. The S&P 500 has risen 11% in 2017 and the Dow Jones closed above 22,000 for the first time ever earlier this week.
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