With news of job creation blazing ahead unimpeded in June, bond investors are having to backtrack on their bets on Fed rate cuts in the months ahead yet again. In the meantime, there may be a realization today that it makes little to no sense to sit in a fixed income asset with a negative real rate of return when you have companies like JPM, as one very obvious example, spitting off a 3% dividend while trading at a 10x forward earnings multiple with the added bonus of a massive stock buyback recently being announced.
The reality of the situation is that there is a significant chance that the entirety of the fixed income community globally is completely misallocated presently. The pervasive, perpetual fear of an economic slowdown that seems to be ingrained in the DNA of bond investors can only cost them for so long. At some point, perhaps in the very near-term, the reality of the relative value available in equities becomes apparent.
What happens when literally trillions of dollars of misallocated capital globally realizes that the have been overly-pessimistic in their assessment of the economy? What happens when these same investors begin feeling pressure to deliver returns by actually embracing risk instead of settling for capital preservation at a zero real rate of return?
While it may seem that equities are extended due to the unprecedented nature of the current expansion, the reality of the situation given global capital allocation favoring fixed income, may be that the persistent trend up in equities has quite a number of years left, with the added bonus of an acceleration in the trend up as capital is forced to seek real returns in excess of zero.
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