A cautionary note about valuations in the current market environment. Conditions are in place today for overvalued US equities to get more overvalued. Persistently low long term interest rates and a “highly accommodative” monetary policy encourage investors to pay more for every dollar of earnings. Note that equity investors, who have not been paid in recent years for taking equity risk, are being paid exceptionally well in this environment.
We maintain full equity exposure today but protect clients by having above-normal allocations to undervalued non-US equity markets and below-normal allocations to US equities.
Conversely, bond investors have been paid exceptionally well in recent years for taking bond risk and should recognize that they have been benefitting from artificial support from the Federal Reserve. These exceptional bond gains will be given back once this support is gone. All holders of income oriented investments should expect to be impacted, as prices for these investments adjust to the new interest rate environment.
We maintain full bond exposures today but avoid owning Treasuries and long duration bonds.