It seems to be the general consensus that equities are overvalued, there’s increasing turmoil/risk internationally, QE is a thing of the past, interest rates can only go up, defensive sector equities are outperforming, etc. etc.
I am thinking hold until year end, ride the holiday highs and then cash out for reallocation. To where, tbd. Thoughts?
QE3 is over but QQE2 from the BoJ is just starting. the BoJ will be buying about 3% of the Nikkei annually, along with 0.2% of the world’s other markets annually, on top of serious bond buying. the GPIF and BoJ already own ~7% of the Nikkei. the GPIF also has plans to buy another 3%. so in one year’s time, the BoJ and GPIF will buy 6% of the Nikkei. no textbook can tell you what happens when that sort of desperation reverberates through markets.
stay tuned because we’re headed down the rabbit hole. this cannot be good from from a LT POV but could be very good in the short-term. thus i’m conflicted on how to play it.
Right, but then what’s the play here in your opinion? I don’t pretend to be an expert, and I try to limit my noise intake, but some of these issues seem to be ticking time bombs. At this point I’m considering largely reducing my equity exposure, but not sure where to reallocate. I can’t imagine FI being a viable option considering the inevitable increase in interest rates. Maybe I’ll look into some alternative assets uncorrelated with equities.
Matt made a great post last week about the impact of Abenomics globally, and what happens if Shinzo Abe loses public support in Japan.
I bet there’s a lot of leveraged positions out there that are long Japanese equities & short yen/long USD - how can you not be long Japanese equities and short JPY under the second round of Abenomics? It’s “Don’t Fight the Fed” x 10. If Abe falls out of favor and this policy is reversed, these positions will get wiped out and there could be some major forced liquidations of other positions that create a lot of market volatility. Check out how quickly Prime Ministers turnover in Japan and it may frighten you.
I don’t think this age of central bank asset inflation is over just yet.
This is a cool image of worldwide central bank assets…pretty crazy…
IMO we must not forget that the end of the FED’s securities purchases is not a single point in time.
It has been slowly happening for a while now and as such has been absorbed by the market.
In Europe the Central Bank is going to go balls to the wall to help the markets if it has to, negative interest rates are starting to happen, euro is low and many great stocks have reasonable valuations --> I have no clue what is going to happen but I am keeping on buying stocks on a cost averaging model.
^ US probably will step up again as well if everyone starts wetting their pants. We can have a pull back but they’re not going to let everything get nuked. So you have no value in the market today but it’s hard to short because the market is manipulated even more than usual. Welcome to the new reality.
Probable Fed rate hikes shouldn´t make any worries, as Yellen already prepared markets in her speeches. Greenspan raised the Fed Funds Rate from 1% to 5,25% (from 2004 to 2006) and the S&P500 performed well because Greenspan in advance announced these hikes.
German DAX companies had their best results in the third quarter, valuations esp. in Europe are not too high. Fixed income will remain unattractive, dividend yields are higher than long-term government yields. Volatility might be higher than average, but an average equity perfomance should be possible.
Courtesy of the above Fed policy, all global assets are once again becoming overpriced. This reminds me of the idea sometimes attributed to Einstein that a workable definition of madness is constantly repeating the same actions but expecting a different outcome! But, as always, asset prices are not uniformly overpriced: emerging markets and, we believe, Japan are only moderately overpriced. European stocks are also only a little expensive, but in today’s world are substantially more risky than normal.
The great global franchise companies also seem only moderately overpriced. Forestry and farmland, which is not super-prime Midwestern, is also only moderately overpriced but comes with our nook and cranny sticker attached. But much of everything else is once again brutally overpriced. Notably, U.S. stocks (ex “quality”) now sell at a negative seven-year imputed return on our numbers and most global growth stocks are close to zero expected return. As for fixed income – fugetaboutit! Most of it has negative estimated returns on our data, and longer debt, as always, carries that risk that may be slight in any period, but is horrific if it occurs – accelerating inflation.
When one combines the apparent determination and influence of those who do the bullying with the career risk and short-termism of the bullied and the desire of the general public to believe unbelievable good news, these overpricings can go much further and the Fed can win another round or two. That’s the problem. A clue to timing would be when we begin to hear more passionate new era arguments: profit margins will always be higher; growth will snap back to 3% for the developed world; and new ones I can’t think of … maybe “when the discount rate is this low the Dow should sell at, perhaps, 36,000.” In the meantime, prudent managers should be increasingly careful. Same ole, same ole.
Exactly right, time horizon changes everything. The S&P has never come close to producing negative 20 year returns. If you bought equities in early 1929, or the monday before black tuesday, etc. you were still in the green 20 years later. Now if you’re like me and planning to purchase your first home next summer, well then yeah its probably not worth the risk to add to equities today.
It amazes me how many people on this site talk about emotions when stating an investment thesis. I must have missed the part of the CFA text that said “Asset allocation is the domanant determinant of long term risk and volatility within a portfolio BUT if you have any gut feeling that the market is going to do something, say f*ck it and trade off that intuition”
I suspect all the QE happening abroad is pushing more money back to the US. Local markets may jump, but their gains offset by currency effects. Meanwhile the US slowly exiting QE makes it seem like a better bet.
I haven’t fully throught this through, but this is my impression of the short and medium term environment.
Huskie has a good point about trading off emotions. Gut feel - when properly tuned - may make some sense for portfolio tilts, but large reallocations don’t make a lot of sense. However, some people can’t resist the lure of shouting “I called it, suckas!!”