Preparing for a Pullback:Essential Tips to Safeguard Your Investments.
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The PE of US stock market is currently approaching 29 times, nearly matching the levels seen in 2021. If it continues to rise, we could face a situation reminiscent of the 2000 dot-com bubble. According to estimates from CEO of Goldman Sach， David M. Solomon , a crash isn't necessarily imminent, but there’s a strong incentive to boost EPS and let valuations ease a bit. While the economic outlook is becoming more optimistic, the stock market remains at a high valuation.
To sustain continuous flow, persistent pressure must be maintained. This suggests that indices shouldn't set new highs but rather engage in sector rotation. Neither Deutsche Bank nor Goldman Sachs has directly indicated an impending economic downturn, but they do agree that current stock market gains appear excessive. Therefore, when considering relatively overvalued stocks, one should evaluate 20Y bonds, especially with a yield of 4.6%.
If you’re comfortable with this return, bonds could offer a chance for rebalancing. However, since the Fed shifted to a rate-cutting mode in September, bond prices haven't significantly rallied—instead, they've declined. The cut in the benchmark rate hasn't had a strong impact on the bond market.
Notably, short-term bonds have held up better, while long-term bonds face more pressure. If market sentiment shifts towards concerns of economic recession, demand for U.S. Treasuries could rise, leading to a drop in yields. Interestingly, from the start of the year to now, many bonds have still delivered positive returns, particularly high-yield and non-investment-grade bonds.
In this environment, investors should reassess their positions in U.S. Treasuries. If you're committed to long-term holding, there's no need to worry about short-term price fluctuations. For those with a diversified investment approach, a strong stock market could mean a reduced allocation to bonds, presenting an opportunity to reinvest in equities. Overall, the bond market cycle has commenced, but due to varying economic expectations, long-term Treasuries remain under significant pressure.
Following the first rate cut, we’ve entered a new cycle for the next 3, 6, and 12 months. However, differing economic expectations are causing long-term Treasury bonds to face significant pressure.
If you've realized that you're not looking to chase after short-term gains but prefer stable returns, then short-term Treasury bills or investment-grade bonds might be more suitable for you. Historically, the goal of asset allocation has been to minimize volatility. This year has exemplified that, as every major stock market rally has been met with bond declines, and vice versa. This presents an opportunity for rebalancing your portfolio.
Now that the stock market is on the verge of new highs, we should shift our focus back to the bond market, particularly long-term bonds that are currently undervalued. The traditional 80/20 or 90/10 stock-bond allocation may no longer hold true; instead, it’s time to replenish those undervalued assets.
Since the Fed’s September rate cut, bond prices, especially long-term Treasuries, have surprisingly decreased. Short-term and investment-grade bonds have shown some resilience, while long-term bonds have dropped significantly. This might actually represent a good buying opportunity.
Interestingly, some wealthy investors are currently liquidating deposits to buy bonds, particularly long-term ones. However, it’s vital to differentiate between buying bonds and bond ETFs, as they represent different strategies.
The enthusiasm for bond ETFs is evident like TLT, TMF, IEF,IEI.
Many ultra richs are buying bonds to secure income, especially as interest rates rise and bond prices drop. This raises an interesting question: if there's still money to be made in the stock market, why not capitalize on that instead? It seems contradictory to pursue capital gains in bonds when stock market gains could be more lucrative.
Ultimately, if you’re focused on total returns, consider rebalancing between stocks and bonds. A 64/36 or 73/27 percent allocation might be appropriate, but the specific types of bonds in your portfolio matter. Many who invested earlier, particularly at the end of 2022, are still holding onto bonds for stability, and it’s important to evaluate which bonds align with your investment strategy.
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