The issues put forth in the previous Bloomberg article are intriguing. As Central Bank accommodations are removed, there will be a slow change in the "weather" for equity markets.
For long term investors, it will be very important to modify your approach well in advance of the "music stopping" to use the analogy at the end of the article.
Navigating this environment is no easy challenge. First, investors should avoid the most overvalued assets, where irrational behavior is evident. Second, they should focus on what’s unloved and still relatively inexpensive, including European periphery sovereign, bank debt and equities. Finally, they should keep liquidity high and use hedges against a rise in interest rates and volatility. Ten years ago, just before the crisis, former Citigroup CEO Chuck Prince said investors should “ keep dancing until the music stops.” Today, we are still dancing, but much closer to the exit door. With many investors searching for the security of "low risk" investments and yield, I wonder about how many of them have somewhat taken for granted the incredible gains made on the stock prices side of the ledger. As referenced in the article, $100K invested in the S+P500 in 2009 is now worth $300K. Keep in mind how many years of gains would you need at 6% to achieve the same results in fixed income or even the high yield market!?!
We know the environment over the past 8 years has encouraged companies to be much more frugal and efficient and there are many reasons why the gains we've seen in the stock market do not seem "out of touch with reality".
The playing field is changing and likely it will change substantially over the next 2 or 3 years (if not sooner). Risk on is the game at the moment but how long should this be the market's mantra going forward? |
