According to this week’s guest, both stocks and bonds are more expensive now than they have been in 90% of market history. How do you invest if both markets are historically expensive? On this week’s WEALTHTRACK, AQR Capital’s Great Investor and Financial Thought Leader Cliff Asness describes some smart approaches.
WEALTHTRACK Episode #1146; Originally Broadcast on May 08, 2015
Listen to the audio only version here:
Explore This Episode
We have compiled additional information and content related to this episode.
- Founder, Managing Principal, Chief Investment Officer,
- AQR Capital Management
Federal Reserve Chairwoman Janet Yellen caused a bit of a stir in an interview Wednesday when she commented that “equity market valuations at this point generally are quite high.”
It wasn’t exactly an “irrational exuberance” speech a la Alan Greenspan in 1996, but pundits were quick to point out that his observation was about four years early as the markets continued to rally until the March 2000 peak.
The market is expensive historically, based on several longer term measures including one of our favorites, the CAPE ratio, or Cyclically Adjusted Price Earnings ratio, created by frequent WEALTHTRACK guest, Nobel Prize winning economist Robert Shiller.
The CAPE, which is figured by taking the current price for the S&P 500 divided by the average of S&P earnings over the last ten years, adjusted for inflation, is currently around 27. That is well above its 20th century average of 15..
Fed Chairman Yellen isn’t the only one concerned about stock market levels. Professional investors are too.
According to a recent survey from State Street Global Advisors, of over 400 institutional investors worldwide, 63% of them increased their stock exposure over the last six months, but 53% wish they could decrease it and would if they had a more attractive alternative. Talk about conflicted!
Plus, 57% expect a market correction of between 10 and 20% in the next 12 months!
Normally investors could turn to bonds for income and protection, but with bond yields near record lows, they are no longer a viable option.
According to this week’s guest, Clifford Asness, both stocks and bonds are more expensive now than they have been in 90% of market history. Asness is Founder, Managing Principal and Chief Investment Officer at AQR Capital Management.
AQR stands for Applied Quantitative Research, which they use in a number of strategies.
Founded in 1998, AQR, now a global investment management firm, oversees more than 130 billion dollars in hedge funds, mutual funds and a diversified collection of investment strategies, from traditional long-only ones to multiple alternative approaches. I asked Asness how unusual it was for both stocks and bonds to be this expensive at the same time and what investors should be doing in response.
If you’d like to see the show before it airs, it is available to our PREMIUM subscribers right now. We also have an EXTRA interview with Asness, about his new venture with London Business School, available exclusively on our website.
Have a great weekend and make the week ahead a profitable and productive one.
CONSIDER ADDING SOME COMMODITY EXPOSURE TO YOUR PORTFOLIO
- Currently unpopular
- “Only asset class to make money in an inflation shock”
No Bookshelf titles this week.
ASNESS: DIVERSIFICATION VEHICLE
OWN SOME BONDS
- Equal weights to equities
- Smaller but positive long-term returns
- Diversification role
[tab]No stock mentions in this episode.[/tab]
PREMIUM subscribers have access to this transcript here.
You can also purchase and download this transcript safely and securely with your credit card or PayPal account for $4.99. You will need the free Adobe Acrobat Reader (Mac/Win) or Preview (Mac) to view and print the transcript.
[post-content id=7944 show_title=”true” show_date=”true” show_excerpt=”true” show_image=”true” ]
FROM THE WEALTHTRACK ARCHIVES:
One third of AQR Capital Management’s professional staff, including Cliff Asness hold PhD’s, but even they are constantly challenged by the financial markets. AQR and the London Business School recently announced the creation of the AQR Institute of Asset Management, a ten year partnership aimed at advancing research and best practices in the global asset management community. Cliff Asness explains the thinking behind the project.