Quantitative hedge fund WPT believes there’s a ‘significant’ risk of a market correction in 2018 and is preparing for probable market turbulence.
While accelerating global growth, corporate tax reform and a business-friendly administration in the US have contributed to market gains, it’s not clear these factors justify current valuations, especially considering debt to GDP levels globally.
The best global economic growth in seven years has helped a multi-year bull rally in stocks. The current S&P 500 Index’s price to earnings ratio of about 25.07 (as at 22/6/18), also the S&P 500 price to sales ratio sits a significant premium at 2.24 compared with 0.80 in March 2009, these value metrics may be justified if implied volatility remains low and 30-year bonds holds below 3 per cent.
“However, with higher interest rates and more volatility a distinct probability there is a significant risk that asset prices will correct,” says Vidal Wills (pictured), Co-CEO of WPT.
“While the fear of missing out may not be a concern for equity investors, increasing euphoria mixed with a bit of complacency certainly is,” says Gagan Chahal Co-CEO of WPT. “Historically low levels of volatility may well have given investors a false sense of security in the nearly two years since the last market correction.”
Chahal also cites the flattening of the yield curve as a cause for concern and said there are technical pressures on Treasuries that may further weigh on bond prices.
“While we cannot know when that will happen with the current markets, we are doing our best to prepare for what may be volatile times ahead,” Chahal says.
