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Longer-term Market Trends Merit Your Attention Thumbnail

Longer-term Market Trends Merit Your Attention

As those of you who follow us know, we have great confidence in  Capital Economics due to its excellent track record of being accurate about market trends around the world . We strongly encourage you to read at least the bold font of their 2/12/21 publication below.   Our conclusion is that one’s portfolio should remain fully invested but a percentage should be shifted from tech-oriented momentum stocks to assets that will still go well in the bull market, and should do well if market returns become less attractive.  To that end, we like companies that will benefit from blockchain technology, digital assets, an ETF focused on companies with potentially disruptive tech, private funds with hard assets, and long-short equity funds that have performed well in this bull market as well as prior market declines. If you’d like to learn more about our thinking, please reach out to us.

Capital Economics long-term perspective on valuations and returns--synopsis

Although we forecast that “risky” assets in the US will continue to deliver solid returns over the next couple of years, there is reason to believe that their performance over the next decade as a whole will be mediocre. The Spanish flu pandemic a century ago may have been followed by the “roaring twenties” decade of extremely strong returns, but the circumstances today are very different.

We do not think that the high absolute valuation of risky assets in the US means that they are in the late stages of a major bubble--they appear far less stretched compared to the yields of “safe” assets, which are extremely low, and in our view are likely to rise only gradually in the next two years. As yet, we do not see the scale of leverage in key parts of the financial system, or of the type of macroeconomic imbalances, which tend to accompany major systemic bubbles.

However, you do not have to believe that a big bubble has inflated, or that a crash is imminent, to think that returns from risky assets will be mediocre over the coming decade. The past relationship between initial valuations and subsequent returns alone suggest that returns over the next decade will not be very strong.  To match long-term average returns, the earnings yield of the stock market would probably have to keep falling for years. While it is possible that it drops a bit further in the near term, that seems unlikely to continue over a decade, especially if the yields of safe assets edge higher as we expect.

Asset Allocation | 12th February 2021 Oliver Jones, Senior Markets Economist, oliver.jones@capitaleconomics.com Asset Allocation Update