Still too soon to sound the alarm

Although the valuations of most risky assets have risen further above their long-run averages during the past quarter, we still don’t expect them to come crashing down any time soon. As we argued in the previous edition of The Capital Markets Analyst, we think that higher-than-average valuations are justified by a structural decrease in interest rates, which has reduced required rates of return. Admittedly, we think that there will be a faster-than-expected cyclical increase in interest rates in the US and UK next year. But as long as the global economy remains healthy, we think that the markets will continue to shrug off this tightening. We remain of the view that the music won’t stop until 2019, as the US economy starts to falter.