To be sure, it’s not as if the economy is falling off a cliff; rather, it’s simply growing more slowly than many had hoped. Yet despite the weakness, equity market valuations have been climbing. U.S. large caps are now trading at more than 17x trailing earnings, close to the multi-year high recorded late last year.
Meanwhile, beyond stocks, spreads on U.S. high yield bonds have tightened considerably, meaning investors are willing to accept ever smaller yield premiums for the additional risk of holding high yield debt. In short, for now, investors seem to be making an implicit bet that the spate of weak data will be temporary and that the economy will resume its acceleration when the spring thaw hits.
While this may be a reasonable bet, if the economic data doesn’t start to improve in coming months or if the geopolitical situation worsens, stocks and other risky assets may become more vulnerable and face a tough spring ahead.
Source: Bloomberg, BlackRock research
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.