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Are Equity Markets’ Valuations Stretched?


Nov. 20 2020, Updated 2:57 p.m. ET

IMF says valuations of risky assets are stretched

The International Monetary Fund (or IMF) also warned that the downside risks to world financial stability have increased over the past six months. It added that investors “should not take too much comfort” that the implications of the sharp sell-off in February 2018 didn’t lead to any major disruptions. In this context, it added, “Valuations of risky assets are still stretched, with some late-stage credit cycle dynamics emerging, reminiscent of the pre-crisis period.” This it believes could lead to the unwinding of risks, leading to higher risk premiums and repricing of risky assets.

While prices are high relative to historical values for a variety of assets, the IMF believes that “Stock prices are high relative to fundamentals around the world, especially in the US.” The agency also thinks corporate bond valuations are elevated.

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IMF’s views echo Morgan Stanley’s

The IMF’s view of US equity markets is similar to that of Morgan Stanley’s (MS). On Tuesday, April 17, 2018, leading investment firm Morgan Stanley released a report in which it predicted that the bull markets in the US would end soon. Morgan Stanley stated that earnings growth and the valuation of the US equity markets are gradually reaching their peak, which typically indicates nervousness, since there is a huge probability it could fall. However, particular sectors or specific stocks could stand out.

The broader market S&P 500 Index (SPY), the Dow Jones Industrial Average Index (DIA), and the NASDAQ Composite Index (QQQ) rose 26.5%, 31.3%, and 43.8%, respectively, from November 8, 2016, to April 18, 2018. The bull market had one of its greatest performances in that period. Since the US presidential election in November 2016, we’ve seen a continuing rally. However, in recent months, the indexes have seen some correction.

A haven asset

Investors usually flock to gold when other investment alternatives aren’t doing well and uncertainty is rising. A positive sentiment for gold could affect miners such as Royal Gold (RGLD), Barrick Gold (ABX), Kinross Gold (KGC), and Coeur Mining (CDE), which are leveraged plays on gold (JNUG).

Although royalty companies such as Royal Gold did well in 2017, other miner categories lagged. Barrick Gold and Coeur Mining returned -9.4% and -17.5%, respectively. With its return of 39.9%, Kinross Gold was an outlier in 2017.

Check out all the data we have added to our quote pages. Now you can get a valuation snapshot, earnings and revenue estimates, and historical data as well as dividend info. Take a look!


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