In the case of the credit crisis, we find many investors, investment professionals, and the general media attribute the market collapse almost entirely to the shenanigans in the financial sector and related consequences in the real economy. What appears to get lost is the fact that valuations outside of the financial sector were once again elevated far above the fundamentals.
This brief article revisits the credit crisis and subsequent market decline. We contend that the financial crisis that reverberated throughout the global economy was not necessarily the primary driver of the market’s approximately 50% collapse. Instead, we believe it was more of a catalyst for the true 800 pound gorilla facing markets at the time: overvaluation.
Our perspective has direct implications for investors today as we find valuations once again significantly elevated. Indeed, several years of quantitative easing (QE) has elevated prices and valuations in virtually all asset classes. We do not know what the catalyst will be this time around (China, Brexit, US politics, geopolitical issues, etc) or what will happen over the short term, but we find both stocks and bonds are priced for dismal returns over longer periods.