Equities seem historically high in comparison to government bonds. Johannes Eisele/Getty Images
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High points in stock-market valuations have been reached on only a few occasions in history.
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According to PIMCO and GAM Asset Management, equities appear historically high when contrasted with government bonds.
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PIMCO mentions that the market’s optimistic expectations regarding future corporate earnings “may face disappointment”.
Stock valuations are now progressing towards levels that have not been observed prior to some of the most significant market collapses in history – at least according to one measure, after a rally that defied forecasts of increased interest rates and a recession.
A reliable method of evaluating whether equities are fairly valued is to compare them with government bonds, which are considered one of the safest investment vehicles.
By this standard, stocks are showing historically high prices, as per assessments by experts at PIMCO and GAM Asset Management.
A critical measure of stock prosperity in relation to debt is the so-called equity risk premium – or the surplus return on stocks over Treasury bonds.
This metric has decreased this year, indicating inflated stock valuations reaching levels observed during the Great Depression of the 1930s and the dot-com bubble of the late 1990s.
Examining the historical data in depth, PIMCO portfolio managers Erin Brown, Geraldine Sundstrom, and Emmanuelle Scherff write in a recent research note, “During the last century there were only a few instances when U.S. equities were more expensive relative to bonds – such as during the Great Recession and the dot-com crash.”
“History suggests that equities will not remain so expensive relative to bonds.”
Julian Howard of Switzerland’s GAM Asset Management expresses that the historically low equity risk premium is an impediment to investing in stocks. This indicates that stocks are providing investors with minimal incentive to opt for risk-free assets like government debt – a factor that may deter potential buyers.
“The equity risk premium is very, very narrow. In fact, it’s almost negative,” Howard mentioned in comments on the GAM website.
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“And that’s a big concern because it’s saying that actually you don’t need to invest in equities in the short to medium term. If you invest in a six-month Treasury bill, which “Giving you 5.5% completely risk-free, so it really is a risk-reward that is completely unbeatable,” he said.
U.S. stocks are on track for their best month in the year with hopes that the Federal Reserve may put an end to its interest rate hikes, at a time when the economy remains resilient and inflation has eased.
The S&P 500 has risen by 7.4% in November, taking its year-to-date gain to 17.3%, amid optimism that corporate earnings will remain strong in the coming quarters.
However, PIMCO advises against this approach.
Brown, Sundstrom, and Sheref wrote, “We believe that strong forward earnings expectations may compensate for disappointment in a slowing economy, combined with high valuations across large segments of the markets, in favor of quality and relative value opportunities, equity. But it calls for a cautious neutral stance.”
Read the original article on Business Insider
Source: finance.yahoo.com
