Why barking up the equities tree could end with a nasty bite

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Risks abound, from bond markets losing their horns to homogenous investor positioning

It’s fully 65 years since William McChesney Martin, then chair of the Federal Reserve, said it was the Fed’s job to take away the punch bowl when the party was really warming up, and just over 40 years since Businessweek infamously pronounced the death of equities.

Finding someone with a bad word to say about risk in general, or equities in particular, is about as easy as it was finding someone with a good word in the late 1970s. Following are some bad words. The best models — those that are mean-reverting and which have provided a good guide to long-run returns over more than 100 years — are very expensive indeed. So is corporate debt. Buying investment-grade and junk bonds was a fantastic thing to do in early 2009 and I went hoarse saying so at the time. In early 2009, BBB bonds yielded something like 9.5% and junk bonds about 20%. Now junk bonds yield about 4.5% and BBB bonds a smidgen over 2%.

Source: Financial Digest (financialdigest.net)

 

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