Validea's Guru Investor Blog is all about investments, focusing on stock market news and advice. At Validea, we believe the best way to outperform the market is to learn from those who have consistently done so in the past. We have built a series of models based on the fundamental stock selection methodologies of legendary investors.
The current environment in which stocks, bonds and credit have been expensive at the same time—a situation last seen in the 1920’s and 1950’s–will eventually bring “pain for investors,” according to Goldman Sachs Group Inc. This according to a recent Bloomberg article.
In a recent note, Goldman argues that the slowdown in quantitative easing is “pushing up the premiums investors demand to hold longer-dated bonds” which will suppress returns over the medium term. Another possibility, it says, is that both stock and bond valuations would suffer a sudden decline, the degree of which would depend on whether it is triggered by a “negative growth shock, or a growth shock alongside an inflation pick-up.”
The market’s elevated valuations, says Goldman strategists, result in the market having less buffer to absorb such shocks. An increase in interest rates, they say, presents a key risk for traditional 60/40 portfolios. These portfolios (with S&P 500 index stocks and 10-year Treasuries), according to Goldman, generated a 7.1% inflation-adjusted return since 1985 compared with 4.8% over the last century.
Given Goldman’s expectation of lower but positive returns, it suggests that investors “stay invested and could even be lured to lever up.” The strategists suggest allocating more funds to equities and scaling back “duration in fixed income.”
In a recent article for Barron’s, Blackstone Advisory Partners vice chairman Byron Wien shares his insights regarding factors that could potentially upset the economy.
Giving an overview of the global economic and political climate, Wien highlights the general rise in populism and shares his view on the Trump presidency, Brexit vote, EU, and the economic factors affecting several European countries including France, Germany, Spain and Italy. Regarding the financial markets, Wien writes that “abundance of liquidity” and China’s 10% nominal growth have significantly and positively impacted the financial markets over the past decade.
Wien offers a list of indicators that could lead to disruption, including:
The narrow U.S. yield curve.
Leading Economic Indicator Index—”This index always loses momentum a year or two before a recession is upon us.”
Investor sentiment—”Individuals investors have not yet embraced the market with enthusiasm. That usually happens before the end.”
The Fed—while it is positioned to raise rates, says Wien, it has not been aggressive in doing so.
An “exogenous” event, such as military conflict—”The market is assuming none of that will happen, and if the market is right, we have at least one to two years to go before we get into serious trouble.”