Quote of the Day

Here’s a bit more from the IMF’s latest Global Financial Stability Report that speaks to our concerns over the present level of stock and bond prices relative to the underlying fundamentals (i.e., valuations):

emphasis mine…

“Since April, US equity prices have increased whereas fundamentals-based valuations have declined as higher uncertainty about future earnings outweighed the boost from an expected rebound in earnings and lower interest rates.”

“…valuation models also suggest that spreads of high-yield bonds are too compressed relative to fundamentals, along with investment-grade bonds in the euro area and United States.”

“…vulnerabilities are high in 80 percent of economies with systemically important financial sectors, by GDP. This share is comparable to the fraction at the height of the global financial crisis. Vulnerabilities in this sector have increased in the United States and euro area since the April 2019 GFSR (Figure 1.4, panel 2). This largely reflects an increase in leverage and credit exposures as institutional investors have taken on riskier positions to try to meet targeted returns, as discussed in Chapter 3 (Figure 1.5, panel 1). In China, vulnerabilities continue to be high, largely due to leveraged positions in investment vehicles.”


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