The stock market is heading toward the extremes of the Great Recession and dot-com era

Relative to government bonds, stocks look at all-time highs.Johannes Essel/Getty Images

  • By one measure, stock market valuations have reached peaks that have only occurred a handful of times in history.

  • Stocks look at all-time highs relative to government bonds, according to data from PIMCO and GAM Asset Management.

  • Pimco said the market’s optimistic expectations for future corporate profits may “face disappointment.”

After a rally that defied calls for high interest rates and a recession, stock valuations are now edging closer to levels seen before some of the worst market crashes in history — at least by one measure.

One time-tested way to assess whether a stock is fairly valued is to compare it to government bonds, which are considered one of the safest forms of investment.

Experts at PIMCO and GAM Asset Management say stocks look already at all-time highs based on this metric.

A key measure of the relative abundance of stocks versus debt is the so-called equity risk premium, which is the extra return on stocks relative to Treasuries.

The metric has fallen sharply this year, suggesting stock valuations are approaching levels seen during the Great Depression of the 1930s and the dot-com bubble of the late 1990s.

“Drilling deeper into the historical data, we find that there are only a handful of times in the past century when U.S. stocks have been more expensive relative to bonds, such as the Great Recession and the dot-com bubble,” said PIMCO Portfolio Manager Erin Browne, Geraldine Sundstrom and Emmanuel Sharef wrote in a recent research note.

“History suggests stocks may not remain so expensive relative to bonds.”

Julian Howard of GAM Asset Management in Switzerland said historically low equity risk premiums were holding back equity investments. This means that equities provide investors with little incentive to choose stocks compared to risk-free assets such as government debt, and this may disappear. potential buyers.

“The equity risk premium is very, very narrow. In fact, it’s almost negative right now,” Howard said in comments on the GAM website.

“This is a major issue because what it says is that you don’t actually need to invest in stocks in the short to medium term because if you invest in six-month Treasury bills, which will give you exactly 5.5% with no risk, then this It’s actually a completely unparalleled risk reward,” he added.

U.S. stocks are on track for their best month in a year on expectations the Federal Reserve may end raising interest rates while the economy remains resilient and inflation slows.

The S&P 500 rose 7.4% in November, taking its year-to-date gain to 17.3% on optimism that corporate profits will remain strong in the coming quarters.

However, PIMCO warned of this prospect.

Browne, Sundstrom and Sharif wrote.

Read the original article business insider

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