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Recent weeks have seen stocks, credit and even emerging markets start to recover. Unfortunately, the gains haven’t been driven by signs of economic improvement, firming inflation or rising earnings . Instead, investors are once again taking solace in low rates and benign monetary conditions , which can, and probably will, persist for the remainder of the year. As inflation expectations continue to fall, a 2015 rate hike by the Federal Reserve (Fed) looks increasingly unlikely; even the odds of an early 2016 hike appear to be fading. However, as I write in my new weekly commentary, ” With Stocks on Shaky Ground, a Promising Ballast in Bonds ,” this trend can only take the market so far. The hard truth is that although rising valuations can continue a while longer, particularly if the European Central Bank or Bank of Japan add to their own quantitative easing programs , valuations, especially those of U.S. equities, are already high. Since September 30, the trailing price-to-earnings ratio on the S&P 500 has risen by 10 percent, and at roughly 18 times trailing earnings, U.S. multiples are now back to the same level where the market peaked this summer, according to Bloomberg data. The high valuations come at the same time as disappointing company earnings – a trend evident in the admittedly still early third-quarter earnings season. With revenue growth sluggish, earnings growth will be even tougher to come by if U.S. margins start to descend from their lofty highs. While U.S. stocks can rise further this year, in the absence of earnings growth, the equities are at best stuck and at worst vulnerable to any unexpected growth shock . So, where does this leave investors? Rather than either exit the U.S. market (and potentially miss out on gains) or try to time it, investors with equity-centric portfolios may want to consider a particular hedge: longer-duration bonds. While I don’t see much value in long-dated bonds, in recent weeks they have reasserted their historical role as an equity hedge. Indeed, the 90-day correlation between the S&P 500 and the 10-year Treasury is once again significantly negative, as data accessible via Bloomberg show. As investor fears have gravitated back to the economy, and away from an unfounded fear of the Fed, it’s likely that the correlation will stay negative for the foreseeable future. The implication is that long-term bonds, which may not offer much income, can help provide an effective hedge in equity-heavy portfolios. As such, for investors looking for some longer-term ballast in their portfolios, longer-duration bonds are worth considering. This post originally appeared on the BlackRock Blog. Scalper1 News
Scalper1 News