In particular, investors should be concerned about the low productivity the U.S. has been experiencing recently. Soft productivity suggests not only slower growth, but more pressure on companies’ margins should wages continue rising. For this reason, valuations have historically been positively correlated with the rate of productivity. But the persistently negative productivity readings of the last several quarters are consistent with multiples 10%-15% lower than they are today.
None of this necessarily suggests we are heading into a bear market. Valuations have crept even higher in many of the post-1980s bull markets. That said, low U.S. rates are not enough to constantly propel stocks higher.
Investors looking for better opportunities with less stretched valuations should reconsider international markets, particularly Japan, where multiples can still provide a lift for stocks.
Market Realist –Will Japan be the next investment destination?
Russ quite aptly points out that the high valuations of the S&P 500 will not be sustainable unless there’s a rebound in corporate profits. Investors have once again flocked to bonds (HYG) (JNK), the Japanese yen, and gold due to the 10.0% fall in China’s exports and concerns over a major rejig by the central banks. The $12 billion sell-off in 30-year U.S. Treasuries on October 13, 2016, attracted the greatest demand since July 2016, and the S&P 500 Index fell 0.3%. The Nikkei 225 fell 0.4%. Ten-year Treasury yields closed at 1.7% on October 13 compared to ~1.8% on October 12 as bond prices rose over increased demand.
The recent rally in crude oil prices has also contributed to the rising yields of bonds by triggering inflation levels. Expectations loom large over an increase in bond yields in response to the potential Fed rate hike in December. So Russ prefers Japan as an attractive investment destination due to its relatively strong corporate profits, driven by the weakness in oil prices (USO) (UWTI) and the yen.