BlackRock: Inflated Valuations To Continue Indefinitely (IVV)

Discussion in 'Wall St. News' started by dealmaker, Oct 7, 2017.

  1. dealmaker


    BlackRock: Inflated Valuations To Continue Indefinitely (IVV)
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    October 7, 2017 7:43amNYSE:IVV

    FromBlackRock: We see three key interrelated themes shaping economies and markets in the fourth quarter. Richard Turnill explains.

    Equity indexes have been on a roll, repeatedly hitting new highs lately. Each new all-time high inevitably stirs talk of stretched valuations. The assumption is that valuations are bound to some long-term average–and will necessarily revert. We have a different take.

    We find historical comparisons less useful in a world of structurally lower interest rates–and believe it’s important to rethink returns. This is just one of the three investing themes my BlackRock Investment Institute colleagues and I see shaping economies and markets in the fourth quarter, as we write in our new Global Investment Outlook Q4 2017.

    Theme 1: Sustained expansion
    A broadening of steady growth beyond the U.S. gives us confidence the global expansion is sustainable. Roughly three-quarters of countries are clocking up growth, and we see the global expansion chugging along at an above-trend pace. Drops this year in developed market (DM) bond yields and the U.S. dollar were unexpected given the robust growth backdrop. We see potential for rebounds in both as U.S. inflation firms and the Federal Reserve (Fed) presses on with removing monetary accommodation. Note we do see inflation moving sideways at low levels in the eurozone, even as we expect inflation to pick up in the U.S. These contrasting inflation outlooks suggest further monetary policy divergence is ahead (read more on this divergence and its investing implications in our recent post Opportunities emerge as central banks diverge.).

    What do you expect for the fourth quarter? Join in >
    We do not see the U.S. economic expansion getting long in the tooth. Some slack remains in the economy–even as the jobless rate touches levels rarely seen since the 1950s. Slower growth–a function of structural changes such as an aging society–means economic slack created in the last recession is being eroded at a sluggish pace. Our work suggests the expansion can run for much longer–likely years–until the economy reaches potential and then the peak that marks the end of the cycle.

    A sustained expansion supports company earnings growth, we believe. All major regions are posting earnings-per-share growth higher than 10% for the first time since 2005, excluding the post-crisis bounce, our research shows. Analyst forecasts are holding steady in the U.S. and Europe, Japan is up and emerging market (EM) earnings expectations have almost doubled this year. See the chart below.


    These trends give us comfort taking risk in stocks. We like the momentum and value style factors. Momentum has historically outperformed the broader market except in cases of recession or financial crisis, our work suggests. And increased confidence in the recovery could add fuel to a budding recovery in value, the cheapest companies across sectors.

    Meanwhile, monetary policy makers are taking confidence from a sustained global expansion. Monetary stimulus in the U.S. is set to decelerate, possibly faster than markets expect. We see upside in yields as attention returns to the Fed and some other central banks gradually remove policy accommodation, though structural factors such as aging populations and strong demand for income limit upward moves.

    Theme 2: Rethinking returns
    We expect future returns to look different from the past, partly due to structurally lower interest rates. As a result, we do not see equity valuation metrics falling back to historical averages. Viewed through this lens, equity valuations are not that extreme, we believe. Overall, we believe investors are being paid to take risk, and we prefer equities over fixed income. We like European, Japanese and EM shares, as well as the factors we mention above.

    Theme 3: Rethinking risk
    Spotting systemic risks in advance is difficult, but we see none on the immediate horizon that might undercut the current economic expansion. Market volatility (vol) has been testing lows, but low-vol regimes are the historical norm, not the exception, we find. At this point, we do not spot broad signs of “irrational exuberance” in financial markets today.

    We favor taking advantage of temporary equity market selloffs in the current environment of low volatility and solid corporate earnings. What if a market shock were to morph into a systemic crisis? Buying on the dip only works if the investor takes a long view and has a stomach for volatility. Patience eventually was rewarded after the 2008 crisis–but it took six volatile years to claw back losses from the 2007 peak. Persistence will remain a key feature of markets going forward, as will the reach for yield, we believe.

    What are the risks to our outlook? Policy missteps or miscommunications cannot be ruled out as the Fed and some other central banks reduce accommodation. China’s economy could slow if the country re-emphasizes reforms over short-term growth after a crucial party congress in late October. Geopolitical risks also lurk. But we see few triggers that could shock markets out of their low-vol regime reinforced by steady growth. Read more, including our detailed market views, in the full Global Investment Outlook Q4 2017.

    Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

    TheiShares S&P 500 Index ETF (IVV)closed at $256.11 on Friday, down $-0.27 (-0.11%). Year-to-date, IVV has gained 14.85%.

    IVVcurrently has anETF Daily News SMART GradeofA (Strong Buy), and is ranked #2 of 121 ETFs in theLarge Cap Blend ETFscategory.

    This article is brought to you courtesy ofBlackRock.
  2. sprstpd


    In other words, it's different this time.
    Jzwu2017, trader99, OddTrader and 3 others like this.
  3. Perhaps a dot-com style rise is in the works? Maybe we will get into a positive feedback loop and increased real estate and equity market valuations will spur demand for goods, investments, and more credit.

    However, there are several structural issues to consider: demographics, increased credit use relative to economic growth, reduced credit underwriting standards, and possible sociological changes in the Millenials.

    Momentum is strong in the market now, but once we reach a tipping point, the reversal could be epic. I don't see everyone being able to retire as millionaires in this market cycle.
    Spooz Top 2 likes this.
  4. thaitye


    the reversal will be epic, yes thats for sure
    trader99 likes this.
  5. dealmaker


  6. trader99


  7. I believe that 5 years from now there will have been no "epic" reversal. Your certainty on this is silly, you'd think after 7 years of these ideas people would stop posting this stuff. Memories of Grand_Super_Cycle who insisted that 2012 would have a market collapse bigger then the one in 2008/2009. Will there be corrections and market drops in the future ? Yes. Will they be "epic", I highly doubt it unless we get WW3.
  8. thaitye


    We just had a 400 point 2 day reversal in the /ES. It all depends on what you consider as epic. But I think this is just the start.