Morgan Stanley's assessment:
https://www.marketwatch.com/story/b...019-06-14?siteid=bigcharts&dist=bigcharts
Rational to be cautious from here?
or
Irrational to be cautious?
Always rational to be cautious.
And the best way to be cautious has been proven to be to own a portfolio of the
right kinds of stocks.
(with all that is implied by "the right kinds")
Ever since I bought my very first share, there has never not been an abundance of negative news and pessimistic opinions. (In fact, the very Morgan Stanley outfit you quote about a decade ago employed a very prominent and high-profile economist/equity strategist called Gerard Minack (feel free to google him); Mr Minack published reams of reports with untold number of scary charts to support his very pessimistic views of the world. I suspect he has not stopped doing so, even as equity markets have continues to rise inexorably. Very smart sounding guy, Mr Minack.)
Given you seem to have a bit of predilection for having a view on what the market might do, how do you feel about the following graphic, in relation to how share markets might behave in coming months/years?
View attachment 1608481
By way of explanation, the graph represents the difference of the Earnings Yield of the ASX200 basket of stocks (i.e., the inverse of the P/E) and the Aussie 10-Year Bond Yield.
In other words, it represents the equity risk premium compared to low-risk government debt.
At the moment, equity investors are being paid a yield of some 480bp in excess of the yield being offered on government debt.
The only time that level of spread has been exceeded was during the GFC, the Greek Debt Crisis of 2011/2, in 2016 during concerns about the slowing Chinese economy, and six months ago.
Interestingly, the change in the level of the ASX200 Index over the 24 months subsequent to those points in time was, respectively, 45%, 34%, 23% and 20%.
As a believer in mean reversion when it comes to capital markets, I think that a near-500bp spread of Earnings Yields over Bond Yields is unsustainable.
Accordingly, I expect that spread to narrow.
And it can only narrow in two ways:
1. The Earnings Yield on equities will need to fall meaningfully (i.e., stock prices will need to rise, unless corprate earnings, the "E", collapses spectacularly), or
2. Interest Rates will need to rise significantly
I have no high-conviction view on which one it will be, but what I do observe is that, given the level of debt that is slopping around the globe, there is not much room for interest rates to rise, I don't think that the second point will be able to make much of a contribution to the narrowing of that spread.
)
