Background of the Warning
Pimco, a leading bond house, recently warned of the high valuations of stocks, emphasizing that they are at levels not seen in about 25 years. Pimco views high-quality bonds as an attractive alternative, as they offer better return prospects compared to stocks.
High Stock Valuations
Pimco points out that stocks have rarely been valued as high relative to bonds as they are today. This indicates that the risk premium for stocks, which is the yield spread over risk-free bonds, has fallen to a historical low. According to Pimco, the Equity Risk Premium (ERP), which measures the yield spread for stocks over government bonds, is currently equal to zero. This is a rare phenomenon that has often preceded correction phases in the markets in the past.
Valuation Metrics
The CAPE ratio (cyclically adjusted price-to-earnings ratio), a metric developed by Robert Shiller, is in the 94th percentile. This means that U.S. stocks have been valued higher than they are today only in 6% of cases since 1950.
Attractiveness of Bonds
High-Quality Bonds
Pimco recommends that investors align their portfolios more towards high-quality bonds. According to Pimco, these offer attractive return prospects, especially in a time when geopolitical upheavals and political decisions significantly influence economic developments.
Political Influences
The increasing dominance of political decisions over economic developments, particularly in the U.S., is cited as a reason why investors should focus on bonds. This could contribute to the stabilization of portfolios.
Resilience
Pimco emphasizes the importance of resilience in investment strategies and sees high returns on high-quality fixed-income securities as attractive opportunities.
Overall, it appears that Pimco views current stock valuations as excessive and encourages investors to focus on bonds to benefit from better return prospects.