- October 12, 2018
This is not a cyclical downturn or systemic scare. It’s just a ‘valuation reset.’
Investors should brace themselves “for a little more turbulence,” Jack Ablin, CIO of Cresset Wealth Advisors, told Cresset clients on a webinar on Friday. But not so much turbulence that it is worth selling equities now in hopes of trying to be able to time the market to get back in, he said. Moreover, he stressed that this week’s sell-off in stocks — highlighted by the 1,377-point drop in the Dow Jones industrial average on Wednesday and Thursday — does not feel like the start of a cyclical downturn in the market or even a systemic scare fueled by imbalances in the financial system. Rather, he said this is a normal “valuation reset” sparked by the recent rise in market interest rates.
Ablin pointed out that as the economy is accelerating and as central banks around the world are finally allowing rates to normalize, the yield on the 10-year Treasury is rebounding. Historically, he pointed out, the 10-year Treasury yield has moved in line with nominal U.S. GDP growth. This means eventually, the 10-year is likely to hit “fair value” of around 4.5% — it was at 3.14% late Friday. Despite their October declines, stocks are still arguably cheap relative to bonds, Ablin said. “But the cost of risk-taking is going to go up,” he said, which will put more pressure on stocks to demonstrate to investors that they are worth the added risk.
Click here to see the full presentation.