I bet you never thought you’d hear that again in your lifetime with the indexes at these elevated levels.
Yet that is exactly the conclusion of my friends at bond giant PIMCO when justifying their position in equities, although they prefer European and emerging market stocks to US ones.
PIMCO is one of the few firms here on the US West Coast that you must drop everything to listen to.
With $1.51 trillion in assets under management, and 2,000 staff at 13 offices in 12 countries, they have the research firepower to undertake research exercises about which I can only dream.
Ignore them at your peril! And no, it’s not because the sunshine at the Newport Beach headquarters is to die for.
And, in case you forgot, Thursday, March 9th will be the exact eight-year anniversary of the start of this current bull market.
Granted, there has been a massive run up in stock market earnings multiples, from 9X to 20X, since the indexes bottomed in March, 2009. 666 on the SPY! How could I forget!
But this move has only taken us to the middle of a historic valuation range since 1950 for stocks relative to other asset classes, according to PIMCO’s exhaustive quantitative research (see the charts below).
However, if any of those other instruments change in value, especially bonds, stocks could flip from being cheap to expensive in a heartbeat.
So what is PIMCO doing about all of this?
They are over weighting European and emerging market equities, TIPS as well as other inflation plays, and commodities.
They are under weighting US equities, European and Japanese bonds, and the Euro.
They are remaining neutral on all other asset classes.
Sounds pretty good to me. I guess it is because they are a long time subscriber to the Diary of a Mad Hedge Fund Trader.
The other blockbuster conclusion that PIMCO reached is that ALL asset classes will see substantially lower returns over the next decade than they saw during the last.
This is the predictable end result of interest rates that have stayed so low for so long. Remember, interest rates are still NEGATIVE in much of Europe and Japan.
It is an important time to take stock of the value of asset classes because the global economy is suddenly transitioning on multiple fronts all at the same time.
Government stimulus of the US economy has been dominated by the monetary variety since interest rates were taken to near zero and successive waves of quantitative easing were unleashed nearly a decade ago.
That is all over now. QE ended 2 ½ years ago, and Fed Chairwoman Janet Yellen appears to be on the verge of unleashing a series of interest rate hikes.
Deficit financed fiscal stimulus will shortly take its place, with $1 trillion in new infrastructure promised by the new president.
Globalization has driven the world economy since 1945. That is about to be replaced by American nationalism and protectionism that will close our doors to the international trading community. Think “America First”.
France is threatening to do a copy cat move in their upcoming election, and other countries have taken a decided nationalistic bent as well.
China operated with a fixed exchange rate for decades, then moved on to a “crawling peg” whereby the renminbi trades within a narrow defined band.
It is soon to be replaced by a true free float whereby the value of the renminbi is dictated by true supply and demand.
This will increase the volatility of both the currency and China’s underlying economy, and will become a foreign exchange trader’s dream come true.
Finally, deflation has been the central bank's nemesis for the past 20 years. Ten year expected inflation plummeted to only 1.6% in 2016.
If any part of the president’s tax cutting, big spending policies actually come to fruition, inflation will become the new challenge, led by rapidly rising wages.
Better hunt under the sofa cushions for those old gold coins you used to treasure, and start making plans to spend that coming raise.
If these epochal changes occur in the midst of the global synchronized recovery, as I expect, the transition could be relatively painless, and asset prices everywhere will move higher.
If, however, they unwind against a backdrop of political instability in the US, Europe, Asia, and the Middle East, volatility will become the name of the game.