After Brexit, the already weak global growth is likely to be eroded even further. The world has a wage-depressing surplus of labor and excess capacity. Oil prices will likely plunge even lower than their already low prices. Corporate profits are unstable and deflation is posing an issue for central banks. Given these conditions, it would be logical to expect financial markets to have increased demand for safe-haven U.S. Treasuries. You’d probably also expect to see falling commodity prices, a soaring dollar, emerging market debt, and increasing aversion to junk bonds on the part of investors. This, however, is not the case.
This year, commodity prices such as oil have risen. For months, the 10-year Treasury yield has been flat. Emerging market bonds and junk bonds are attracting increasing amounts of money. It is likely that these conditions may lead to major market correction so that prices will be in line with economic fundamentals once again. When we look at the slow economic growth and negative interest rates that occur in countries with super-aggressive monetary policies, we see that perhaps things are out of alignment and the resolution will be a shocking process for many market participants.
The valuations may not be justified, but there are a few possible explanations for current market conditions that could also serve to lessen the blow of an abrupt reversal. Despite historically high price-to-earning ratios, U.S. stocks still may be cheap. Equities continue to be attractive when the dividend yield on the S&P 500 index is compared to those available on 10-year government debt. When we make this comparison, it seems stocks may be undervalued by more than 60 percent...
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