The investing nirvana that has driven markets in recent years is under attack as central banks scale back stimulus
The rally has driven up valuations, though strong economic performance has meant assets are pricey but not at extreme levels. Photo: European Pressphoto Agency
By
Ken Brown
Nov. 19, 2017 7:00 a.m. ET
84 COMMENTS
A da Vinci sells for $450 million, one bitcoin is worth $7,700 and 99-year-old Austria issues a 100-year bond at an interest rate of 2.1%. Clearly there is too much money in the world.
That isn’t new, but how long can it last? With central banks scaling back stimulus, investments that appear attractive when interest rates are near, or below, zero suddenly look silly. And silly investments usually lose money, often bringing down less silly assets along with them.
The end may come soon, or the current investing nirvana could go on. Heard on the Street walks through the risks and likely scenarios for markets in the coming months.
Many Happy ReturnsSome of the best performers of the past three years.Total returnTHE WALL STREET JOURNALSources: CoinDesk (bitcoin); Factset (Short VIX, FAANG, MSCI); St. Louis Fed (Merrill)*XIV, the VelocityShares Daily Inverse VIX Short-Term ETN †Equal-weighted total return of Facebook, Apple, Amazon, Netflix,Google (Alphabet)
BitcoinShort VIX*FAANG stocks†MSCI EM IndexMerrill U.S. High-Yield Index0%1,0002,0002505007501,2501,5001,750
The rallies have driven up valuations, though strong economic performance has meant assets are pricey but not at extreme levels. Read More: Top of the Market? That Could Be a Good Thing
S&P 500 cyclically adjusted price/earnings ratioTHE WALL STREET JOURNALSource: Robert Shiller
RECESSION1905’20’35’50’65’80’95’1005101520253035404550
Investors are more confident than at any time since the tech bust, and high confidence typically means markets don’t perform well in the future. Read More: Why Worriers (Usually) Get the Market Wrong
Wells Fargo/Gallup Investor and Retirement Optimism IndexTHE WALL STREET JOURNALSource: GallupNote: Index dormant between October 2009-February 2011.
RECESSION19982000’02’04’06’08’10’12’14’16-100-75-50-250255075100125150175200May 1, 2000x155
The biggest and most widely acknowledged risk is in the bond market where central bank stimulus has driven yields to record lows. But as economies have picked up, investors haven’t demanded higher yields to compensate for the risk that rates will rise.
Read More: Bond Markets on the Edge
Yield spread of U.S. corporate bonds over U.S. TreasurysTHE WALL STREET JOURNALSource: ICE BofAML index via FactSet
.percentage points2002’04’06’08’10’12’14’16’180.51.01.52.02.53.03.54.04.55.05.56.06.5
The issue isn’t whether the market will crash, it is how much money investors will make, or lose, in the coming years. With cash sloshing around the global financial system, prices can go higher, but investors who buy at those prices shouldn’t expect their returns to match those earned in the past few years.
Read More: A Risky Corner of the Market With Room to Run
Private Equity Dry PowderMoney raised by private equity firms but not yet committedTHE WALL STREET JOURNAL
The rally has driven up valuations, though strong economic performance has meant assets are pricey but not at extreme levels. Photo: European Pressphoto Agency
By
Ken Brown
Nov. 19, 2017 7:00 a.m. ET
84 COMMENTS
A da Vinci sells for $450 million, one bitcoin is worth $7,700 and 99-year-old Austria issues a 100-year bond at an interest rate of 2.1%. Clearly there is too much money in the world.
That isn’t new, but how long can it last? With central banks scaling back stimulus, investments that appear attractive when interest rates are near, or below, zero suddenly look silly. And silly investments usually lose money, often bringing down less silly assets along with them.
The end may come soon, or the current investing nirvana could go on. Heard on the Street walks through the risks and likely scenarios for markets in the coming months.
Many Happy ReturnsSome of the best performers of the past three years.Total returnTHE WALL STREET JOURNALSources: CoinDesk (bitcoin); Factset (Short VIX, FAANG, MSCI); St. Louis Fed (Merrill)*XIV, the VelocityShares Daily Inverse VIX Short-Term ETN †Equal-weighted total return of Facebook, Apple, Amazon, Netflix,Google (Alphabet)
BitcoinShort VIX*FAANG stocks†MSCI EM IndexMerrill U.S. High-Yield Index0%1,0002,0002505007501,2501,5001,750
The rallies have driven up valuations, though strong economic performance has meant assets are pricey but not at extreme levels. Read More: Top of the Market? That Could Be a Good Thing
S&P 500 cyclically adjusted price/earnings ratioTHE WALL STREET JOURNALSource: Robert Shiller
RECESSION1905’20’35’50’65’80’95’1005101520253035404550
Investors are more confident than at any time since the tech bust, and high confidence typically means markets don’t perform well in the future. Read More: Why Worriers (Usually) Get the Market Wrong
Wells Fargo/Gallup Investor and Retirement Optimism IndexTHE WALL STREET JOURNALSource: GallupNote: Index dormant between October 2009-February 2011.
RECESSION19982000’02’04’06’08’10’12’14’16-100-75-50-250255075100125150175200May 1, 2000x155
The biggest and most widely acknowledged risk is in the bond market where central bank stimulus has driven yields to record lows. But as economies have picked up, investors haven’t demanded higher yields to compensate for the risk that rates will rise.
Read More: Bond Markets on the Edge
Yield spread of U.S. corporate bonds over U.S. TreasurysTHE WALL STREET JOURNALSource: ICE BofAML index via FactSet
.percentage points2002’04’06’08’10’12’14’16’180.51.01.52.02.53.03.54.04.55.05.56.06.5
The issue isn’t whether the market will crash, it is how much money investors will make, or lose, in the coming years. With cash sloshing around the global financial system, prices can go higher, but investors who buy at those prices shouldn’t expect their returns to match those earned in the past few years.
Read More: A Risky Corner of the Market With Room to Run
Private Equity Dry PowderMoney raised by private equity firms but not yet committedTHE WALL STREET JOURNAL
To me + i dont work in a commercial bank-they love debt. BUT that looks like to much auto debt, too much , too much student loan debt, since about 1974/+, which is about where his chart shows savings= bear trend !![My banker dad paid cash for his education....]