Stock prices are trading at record levels with valuations stretched to levels we haven’t seen since the dotcom bubble. Does that scare BlackRock’s Rick Rieder?
“Not at all,” he said. “Not at all.”
Rieder, BlackRock’s Global CIO of Fixed Income, explained during Yahoo Finance’s All Markets Summit on Wednesday that he’s looking at the stock market relative to the bond market, where historically low interest rates are incentivizing investors to move money out of bonds and into stocks. Critically, investors are doing this because the low yields offered by the bond market just aren’t generating the kind of income that investors, including retirees, need.
“Given the dynamic that there’s not enough … income in the world. There’s not enough cash flow in the world today,” he said. “If you take all of the coupon flow off of Treasuries, German bunds, Japanese JGBs — coupon flow, not even where rates are, what the coupon is in the portfolio — it doesn’t equate to the top five companies in the S&P 500. Meaning the cash flow sits in the equity market today.”
Rieder echoes the sentiment of veteran stock market investors, including billionaire Warren Buffett, who argue that stock market valuations must be considered in the context of interest rates. Specifically, low interest rates justify higher stock market valuations.
“When people say the multiple is here and it’s high, actually if you keep the discount rate down, it can run high for a long time,” Rieder said.
Looking at valuation measures like price-earnings (PE) ratios is a good start when considering value. But investing isn’t as simple as just looking at one metric.
“The determination of where you go to try and generate positive return is becoming more and more of an interesting art,” Rieder said.
Sam Ro is managing editor of Yahoo Finance.
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