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Shahla
Money Managing Guru
Joined: 13 Nov 2004
Posts: 3324
Cash Points ££ 126163.28
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 Posted: Sat Feb 17, 2007 10:49 am Post subject: Investing in the Stock Market - Signs of Trouble ? |
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When investing in the stock market it is important to balancing the risks with the potential rewards, if you want to beat the market . Today, we face a world of low yields and relatively high valuations. Most of the stock markets in the developed world are near their long-term highs in terms of valuation. As many investors know and numerous studies have shown stocks offer lower than normal returns after reaching high valuations.
This implies it will be more difficult to balance the risks with potential rewards while achieving above average returns. You might want to read Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles by Joe Ellis. It is an excellent book on how to predict macro moves of the market.
Dividends are at the low end of historical yields, and bonds offer little growth potential after accounting for inflation and risk. The spreads between high-yield debt, i.e. junk bonds, and the best of solid government debt are at historically low levels. The gap between US government debt and emerging market debt fell to its lowest level recently. A mild global recession would push the yield spreads back to normal levels, thus making high-yield bonds or emerging market debt a low-total-return asset.
It is not just in the world of stocks and bonds that valuations are at highs. As a report from Goldman Sachs noted, how can someone pay $135 million for a Gustav Klimt painting? Almost $1,000,000 for a little black dress worn by Audrey Hepburn in Breakfast at Tiffany's? How do you buy an office building in New York with no leases expiring for ten years for more than $1.2 billion with an internal yield of 4%, which is 50 basis points less than a 10-year US bond? And that is before maintenance reserves! This illustrates that valuations in all sorts of markets have reached new highs. The world's markets are awash in capital looking for a home.
http://www.marketoracle.co.uk/Article361.html |
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