Oh My! What’s This Stuff Really Worth?

-Indicators across four channels—the macroeconomy, credit conditions, capital markets, and politics—are all flashing warning signs. These escalating vulnerabilities were moving the markets closer to an inflection point, even before the novel coronavirus entered the picture.

-Warning signals for the US capital markets include the inverted yield curve; unanticipated repo market stress, growing percentage of BBB-rated debt, and steadily increasing numbers of zombie companies; historically high CAPE ratios; and the uncertainties the 2020 US presidential election holds.

-An informed investor acknowledges the challenges and nuances behind assessing an asset’s worth in different parts of the business cycle. The next turn may be toward recession, possibly ending the positive equity market trajectory experienced over the last decade. Now may be an opportune time to rebalance away from long-outperforming US growth stocks into cheaper and higher-yielding US and international value stocks.

 
We’ve all heard the maxim “when the US sneezes, the world catches a cold.” In the last few weeks, the truth in this saying has made itself evident, although in this case, China did more than sneeze. In our interconnected world, when a highly contagious disease such as the novel coronavirus emerges, the damage, both human and economic, can quickly take on a global scale. Globalization provides economic leverage that can cause the gearing to rapidly spin out of control across supply chains, and downside risk suddenly becomes reality. Could this new virus be the catalyst to a Minsky moment?

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Πηγή: researchaffiliates.com