Stocks Suddenly Seem A Bit Boring, When You Look At These Returns

Stocks Suddenly Seem A Bit Boring, When You Look At These Returns
Theodora Lee Joseph, CFA

9 months ago2 mins

US stocks are popular for a reason. If you’d invested in US shares – tech ones in particular – over the past decade, you’d have done very well. But things are changing: other regions and asset classes are presenting very attractive returns against a backdrop of high interest rates, inflation, and recessionary risks.

This chart shows the “Z-score” of different assets, based on 20-year average valuation measures. A Z-score measures how far an asset’s valuation has strayed from its usual, or mean, level. A score of zero indicates that the valuation is identical to the mean and a score of 1.0 indicates that the price is one standard deviation above the mean. Negative scores indicate that it’s slipped below the mean.

US growth stocks have a Z-score of 0.95 on their forward price-to-earnings (P/E) ratio, implying that they’re expensive relative to their history, and so are US large-cap companies and US value stocks. Only US small-cap stocks are trading at a valuation that’s in line with their history. On the other hand, US Treasuries, core bonds, municipal bonds, emerging market stocks, and developed market stocks (excluding the US) all screen more attractively on valuation.

To top this off, according to Morgan Stanley, the equity risk premium – that is, the incremental return an investor can expect for investing in the stock market instead of in risk-free 10-year Treasuries – is at its lowest level in about 20 years. In other words, you aren’t likely to be as well compensated now for the risk you’re taking investing in US stocks.

So, if you’re still investing mostly in US stocks, the question you have to ask yourself is: why settle for a dividend yield of 1.7% on the S&P 500 when you could have better risk-adjusted short-term Treasury yields of more than 5%? With greater economic uncertainty out there and higher interest rates, valuations will become important again. And in that environment, you’d be wise to avoid taking on additional risks. Instead, cast your net a bit wider and consider other high-yielding and income assets.



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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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