Fear is driving bond markets to historic lows: US 10 year government bond yields hit 1.39% this morning.
According to the equity market's recent rebound, Brexit will apparently not have much impact on the global economy and corporate earnings. As I suggested in my blog last Wednesday, central banks (on a global scale) have conditioned a sense of "fearlessness" into equity markets.
The bond market obviously disagrees.
Few economists and analysts will posit that Brexit will not have anything but negative implications for the UK and Euro Area economies and of course there is the potential spillover effect for the US and the global economy.
The political arena now presents an enormous "wild card" with the rise of anti-establishment populism that could bring about an era of nationalism that could in turn possibly spawn protectionist trade policies and immigration barriers. In essence this has the ability to put further downward pressure on already declining productivity and becomes a further burden on the global economy while at the same time creating wage inflation (as closed borders no longer allow wage competition from lower paid immigrants).
Central banks will not be able to answer to this scenario, other than to raise interest rates to combat inflation. In that scenario, equity investors will no longer be "protected" from volatility.
As we head into Q2 earnings "season", S&P 500 prices remain well-above (over-valued) expected 12 month forwrd earnings per share. Q2 is expected to show a negative 5.6 % rate of earnings growth.
Under all these circumstances, are you comfortable owning a high weight (or even a "normal" weight) of over-priced securities in your portfolio?
We are not.
Today is our weekly client webinar where we will discuss all of these issues and others that impact the management of our and our clients wealth. Feel free to tune in to the recorded version which we will post on our website at or about 5pm EDT.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist