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Goldman Sachs warns that market valuations are at their highest since 1900

In its latest note published this week, Goldman Sachs International strategists including Christian Mueller-Glissman, warned of potential downside risks ahead, as a prolonged bull market across stocks, bonds and credit has left a measure of average valuation at the highest since 1900.

Key Quotes:

“It has seldom been the case that equities, bonds, and credit have been similarly expensive at the same time, only in the Roaring ’20s and the Golden ’50s.”

“All good things must come to an end” and “there will be a bear market, eventually.”

“Elevated valuations increase the risk of draw-downs for the simple reason that there is less buffer to absorb shocks.”

“The average valuation percentile across equity, bonds, and credit in the U.S. is 90 percent, an all-time high.”

Keys findings from the report via Bloomberg:

“The exceptionally low volatility found in the stock market -- with the VIX index near the record low it reached in September -- could continue. History has featured periods when low volatility lasted more than three years. The current one began in mid-2016.

Valuations have a “mixed track record” for predicting returns, explaining less than half the variation since 1900.

Major draw-downs in 60/40 portfolios over the past century amounted to 26 percent in real terms on average, lasting 19 months. It took two years to get back to previous peaks, on average.

Bonds are probably less good hedges for equities nowadays -- a point also made by Pacific Investment Management Co.

Central banks “might not be able or willing to buffer growth or inflation shocks,” especially if they judge that imbalances and excesses are building. They also face fewer options to ease monetary policy given low rates and big balance sheets.”


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