Valuations Rising: Is Everything Expensive?

This article was originally published at TopDown Charts

Executive Summary

• Treasuries are expensive, but near-term indicators like technicals, sentiment and seasonality suggest there’s further to go.

• We could possibly say the same about equities and property as valuations reach unnervingly familiar levels amid the wash of global liquidity.

• Commodities continue to present a longer-term bullish case.

Equities Increasingly Expensive

Putting money to work in an asset class has not gotten any easier this year. The S&P 500 has soared to new all-time highs of late and global markets, while trading at reasonable valuations, are significantly off their 2020 nadirs. One equity valuation metric we track is the global PE10 breadth. It shows that more country stock markets feature PE10s in the 10-25x range ("expensive") versus the 10-15x range ("cheap") for the first time in many years. Value has eroded. Where to turn?

Treasuries Increasingly Expensive, But Might Catch A Tailwind

In the fixed income space, the emerging rally in bonds with the U.S. 10-year yield falling from its Q1 high near 1.74% to under 1.30% at times last week (a 5-month low) presents challenges to investors looking to find a cheap asset class in safe securities. But we see near-term bullish trends in Treasuries.

We noted that the U.S. 10-year yield failed at climbing through resistance earlier this month. The bond bulls are also excited about near-term seasonality—the U.S. 10-year rate tends to fall now through early Q4. Longer-term, however, low yields today make for expensive valuations and weak expected real returns.

Real Estate Too Hot To Handle

What about real estate? The U.S. property market is “on fire,” as has become common terminology. A variety of macro and demographic factors are at play, while low interest rates have made U.S. housing market valuations particularly sky high.

Commodities Still Somewhat Cheap

Another asset class up our sleeve are commodities. The GSCI Commodity Index features a Z-score (a measure of the ) that is below 0. Other asset classes listed above are one to two standard deviations more expensive than their historical average, according to our preferred valuation metric as shown in the Chart of the Week.

Chart Of The Week: U.S. Asset Classes: Valuation vs. History

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Our Weekly Macro Themes report turned bullish on commodities on March 20, 2020, and the thesis has worked well over the last 16 months. Recently, commodities like lumber and copper have pulled back, while oil prices have sustained their bull market into the third quarter. Oil typically rallies during the first half of a year, then meanders in Q3. We’ve seen that already with WTI pulling back last week.

Commodity Rotation

Could there be more commodity rotation on the way? Precious metals present an interesting case. The Weekly Macro Themes report outlines how defensive assets perform from July through December in the average year. Gold tends to do well in August and September as the U.S. dollar is sometimes under pressure. Some momentum has already emerged with gold rallying three straight weeks.

A Tough Period for Risky Assets—Treasuries Often The Safe Haven