Global markets, stocks, bonds and housing, are at their “peak valuations relative to history” according to Deutsche Bank strategists Jim Reid, Nick Burns and Seb Baker who last night released their latest “Long-Term Asset Return Study”.
They say their annual study allows Deutsche “to take a step back through time and try to add some historical context to current market conditions”.
What’s worrying about their findings however, is that as the global economy starts to falter again, and after six years of extraordinary central bank monetary policy across the big economies of the developed world, market valuations are as stretched as they have been at any time in the history of their study.
Reid, Burns and Baker find that:
Looking at three of the most important assets (bonds, equities and housing) across 15 DM countries, with data often stretching back two centuries, we are currently close to peak valuation levels relative to history. Indeed when aggregated, current levels are higher on average across the three asset classes than they were back in 2007/08 and certainly higher than in 2000. At the equity market peak back in the summer months of 2015 we were pretty much at the peak.
Of course, stock markets have fallen recently but the authors say that this is “still one of the more expensive points in history to be an owner of the asset class at the index level at least”.
But overvaluation, or peak valuation, as we know can persist for some time without a reversal and indeed without a crash.
Reid, Burns and Baker ask the question: “What could start the declines away from the peak prices we currently see?”
The most likely driver would be something that changes the current policy orthodoxy where central banks are continually keeping rates at close to zero and accumulating assets at a pace never previously seen through history. Anything that changes this will likely be a negative for assets. As discussed, if the Fed do start a sustained hiking cycle then the evidence is that the economy and assets will eventually adjust. Perhaps this time this will be more extreme given the weaker economy and higher asset prices leading into the tightening.
It’s not hard to see why markets are worried about the looming change in direction from the US Federal Reserve and the Bank of England.