Returns from stocks and bonds are likely to suffer in the long-term, CEO and CIO of Research Affiliates Chris Brightman told Yahoo Finance Live.
“[Investors should expect] not just lower long-term returns from the bond market but lower long-term returns from the stock market as well,” Brightman told Yahoo Finance Live. “Remember, the stock market's trading at near all-time highs in terms of prices relative to, say, cyclically adjusted earnings or extraordinarily low dividend yields. And that's perhaps justified by extraordinarily low interest rates.”
Interest rates are indeed low, at the moment, though the Federal Reserve’s long-awaited first rate hike was approved last week. The Fed announced last Wednesday that it would raise interest rates for the first time in four years. By that time, the decision seemed all but inevitable after several consecutive months of increasing inflation. Markets continued going up last week, before taking a slight dip at the beginning of this week.
The S&P 500 (^GSPC) rebounded to close higher on Tuesday, after stocks closed lower on Monday in response to stagflation fears. Consumer inflation, as measured by the Bureau of Labor Statistics’ monthly Consumer Price Index (CPI), rose nearly 8% in February, raising concerns that persistent inflation could be combined with slowing economic growth to produce a sluggish economic quagmire which economists generally look to avoid.
The current market performance has priced in this information rather optimistically, especially within the bond market, Brightman said.
“The bond market's pricing [reflects a] sort of perfection of a soft landing with no recession,” he said. The S&P 500 Bond Index, a corporate-bond counterpart to the S&P 500, has steadily declined throughout 2022.
The chances of that “soft landing” for bonds are rather slim, he added, but above zero.
“I think it's a rather unlikely one, but there's two other possibilities around that,” Brightman said. “One is that we're in a recession by 2023, and the other is that we're in stagflation. The recession obviously bodes very poorly for stocks and temporarily maybe not so bad for bonds. Stagflation is just terrible for bonds and generally not a great environment for stocks as well, and one that favors value stocks.”
With uncertainty remaining about the outcome of the Russian invasion of Ukraine and its ongoing global economic consequences, there's no consensus regarding if or when there will be a recession.
Add a flattening yield curve to the mix, and the circumstances look even more murky for the long-term future. An inverted Treasury yield curve has long been considered a signal of an incoming recession.
With so many possibilities, the current markets reflect the existence of several conceivable alternatives, Brightman added.
“So rather than thinking about the bond market as pricing in one future, I think there's several futures that they're pricing in and one is stagflation,” he said.
Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.
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