March 27, 2013 | By Scott Minerd, Global CIO
Asset valuations are becoming more extended, making risk assets such as equities and below investment grade debt vulnerable to a near-term setback. For the past five years, risk assets were fundamentally cheap, providing a cushion against market noise and periodic setbacks. We are transitioning into a period, though, in which bargains are much harder to come by in many of the major asset classes. High yield debt and corporate bonds, in particular, appear overbought at current levels. Although these markets are not exhibiting signs of a bubble, stretched valuations make these asset classes more sensitive to bad news. Despite the favorable longer-term economic outlook, investors should be prepared for the type of price volatility which is characteristic of more mature bull markets.
The Citi Macro Risk Index, calculated based on credit spreads, swap spreads, and implied volatility on major asset classes, is often used to measure risk aversion in global financial markets. This index has tracked closely with the S&P 500 over the past few years, however, the correlation broke down in January of this year. Despite an increasing level of macro risk driven by uncertainties in the eurozone, U.S. equity indices continue to climb to new highs.
Source: Citigroup, Bloomberg, Guggenheim Investments. Data as of 3/22/2013.
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2014, Guggenheim Partners. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.
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