The United States stock market has been riding high since the end of the Great Recession. With low interest rates and money pumping, Wall Street has been posting record highs what seems like every day.
But can the party go on forever? Some may believe the economic expansion will be perpetual, but the reality is that a bust will inevitably occur.
And one Wall Street firm thinks it will happen son.
According to Vanguard Group (via CNBC), there is now a 70 percent chance of a stock market correction. The report alludes to the narrowing of the bond yield curves and expanded U.S. equity valuations. Also, the analysts say that the trade-off between stocks bonds is not as strong as it was at the beginning of the bull market.
“It’s about having reasonable expectations.Having a 10 percent negative return in the U.S. market in a calendar year has happened 40 percent of the time since 1960. That goes with the territory of being a stock investor. It’s unreasonable to expect rates of returns, which exceeded our own bullish forecast from 2010, to continue,” said Vanguard’s chief economist Joe Davis.
“The risk premium, whether corporate bond spreads or the shape of yield curve, or earnings yields for stocks, have continued to compress. We’re starting to see, for first time … some measures of expected risk premiums compressed below areas where we think it can be associated with fair value.”
The financial firm doesn’t urge investors to sell, sell, sell. Instead, an investor should stay invested as long as they can handle a down year.
“It’s important to separate what is expected of the global economy from the price being paid for it. In the United States, stock prices have already been bid up based on future business expansion,” he said.
“Don’t become overly aggressive. The next five years will be challenging, and investors need to have their eyes wide open.”
Another way to invest is to search for stocks outside of the U.S., particularly in other developed markets.
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