Are we close to peak returns on risky assets? The possibility seems more likely these days.
The future is still uncertain, of course, so all predictions should be viewed with caution. For perspective, let’s start with the one thing we know to be true: we’re closer to the top than we were in the previous update (May 5) for this periodic profile of 1-year rolling returns of the major asset classes. The mystery, as always, is the exact date of the upcoming peak.
Of note, there is growing confidence among economists to predict that the Federal Reserve will raise rates one last time at the July 26 FOMC meeting. The central bank “will raise its benchmark overnight interest rate by 25 basis points to the 5.25% to 5.50% range on July 26, according to the 106 economists surveyed,” Reuters reports. A majority expects the expected hike to be the last in the current tightening cycle.
A unique outlook for interest rate hikes is also the way forward, according to Fed Funds Futures, based on data released by CMEgroup.com.
Also consider that the average return on global risk assets has fallen again, based on a set of ETFs. Today’s update indicates that the 12-month yield for major asset classes slipped to 3.76% – the third consecutive decline for these updates.
The highest-earning tranche for global markets is still non-U.S. inflation-linked (WIP) government bonds, currently at 8.48%, according to Morningstar.com. Although this is down 60 basis points from the May update, it is still a high payout rate – more than double the average for the ETFs listed above.
Also note that the 3.76% average return on risky assets above almost matches the current yield on a 10-year Treasury (3.75%), based on Data from Treasury.gov.
Conclusion: the markets still offer a good number of opportunities for investors hungry for yield. The standard caveat, however, is still there, namely: the distribution yields of stocks and other risky assets listed above are not guaranteed (unlike current government bond yields). Also keep in mind the possibility that whatever you earn in payout rates in a stock, bond or real estate fund could be wiped out, and more with lower stock prices.
Meanwhile, CapitalSpectator.com predicts that we have seen the peak in the average return of global risk assets. The main risk to this outlook: the easing of inflation of late is proving more rigid than expected, or perhaps rebounding in the coming months. It’s a low probability risk at this point, but it’s not zero.
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