When Optimism Meets Reality: A Bearish View

Timothy J. Gramatovich, CFA

We don’t recall a more difficult or dangerous investing environment in the past 40 years. Nearly everywhere we look – gold, equities, cryptocurrencies, credit spreads – valuations are at or near all-time highs. What makes this even more extraordinary is that these extremes are occurring against the backdrop of a shifting global order, where the forces that once defined globalization, such as efficient supply chains, cheap labor, low taxation, and limited tariffs, are now reversing.

One could argue convincingly that the 35-year period from 1985 to 2020 was the most favorable investing environment in history. Interest rates, as measured by the 10-year Treasury yield, declined from roughly 10.5% in 1985 to less than 1% during the COVID era. Growth and profitability driven by globalized trade were unprecedented. As these trends unwind, it seems irrational that risk assets would continue to advance unchecked.

As Keynes famously observed, markets can remain irrational longer than you can remain solvent. Valuation alone is a poor timing tool – expensive assets can always become more expensive – but if mean reversion over long periods is ultimately a law (and we believe it is), then much of what investors are doing today in most asset classes – particularly equities – is speculation, not investing.  There is nothing inherently wrong with speculation; the mistake lies in mispricing risk.