Our perspective on global micro event and strategies.
As a portfolio manager, Connor works on the Investment Grade Credit Team where he helps manage risk across the different credit-specific mandates. Additionally, he helps to generate new investment ideas, as well as assist in formulating strategy with respect to the Investment Grade Credit asset class.
I call it: “Cheap US equities: the low-rate adjustment.”
The strong post-March 2020 rebound in US equity prices rekindled rumblings about stretched or even “bubble-like” valuations. Myriad metrics can be rolled out to suggest “excessive” price levels, but how often do these arguments account for the broader investing landscape — inclusive of interest-rate expectations and the relative risk/return offered by US Treasuries? I believe they should.
One way to think about the relative value and appeal of equities is to look through a fixed income lens with a focus on risk-free rates. For the past decade, US stocks have remained cheap relative to Treasuries because…
Do low yields justify high stock prices? My colleague Ben Cooper recently penned a timely response to this age-old question. (Click here for Ben’s piece.) Actually, it was three possible answers — yes, no, and it depends — based on differing interpretations of the index-level data.
While I agree with many of Ben’s points, I’d like to take a somewhat different approach. My overarching view is that historical analysis of the relationship between interest rates (yields) and equity-market valuation (stock prices) is not particularly useful…
In my last blog post, I described how the shifting composition of the US equity market over the past 20 or 30 years has caused the S&P 500 Index to look more and more like a bond every day. Broadly speaking, there is now a far greater percentage of companies with “annuity-like” profits – recurring, scalable, and not capex-heavy to maintain.
This evolution has potentially important implications for the relationship between bond yields and stock prices. In short, I argued, a case can be made that low yields (like today’s) do in fact justify high stock prices (again, like today’s).
The more I think about it, the more sense it makes. After all, with government bonds and other areas of fixed income sporting record-low yields in today’s environment, why wouldn’t income-oriented investors…