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And it’ll be tough to find a place to hide.
“With the S&P 500 close to all-time highs, stretched valuations and a lack of growth, drawdown risk appears elevated.”
So says Goldman Sachs Group Inc. Managing Director Christian Mueller-Glissmann, who highlights that selloffs in excess of 20 percent for major bourses occur relatively frequently and recently have been brought about by concerns of a global nature. With a possible Brexit, the U.S. presidential elections, and a Fed that appears committed to continuing to lift policy rates, this level of event risk is certainly on the table.
He adds that the calm implied by the low levels of the Chicago Board Options Exchange Volatility Index belies the fragility of markets, which have become more susceptible to abrupt declines.
The especially bad news for investors is that it’s harder to hedge against such a drawdown. Increased correlations between regional equity markets make it tougher to hide out in foreign stocks, defensive equities and low-volume ETFs have been bid up, and bond yields linger at ultra-low levels.
With bond yields not discounting enough inflation, in the Mueller-Glissmann’s opinion, a traditional 60/40 asset allocation between equities and bonds will fare particularly poorly in the event of a collapse in stocks as the negative relationship between stocks and bonds wanes.
Full article: Goldman Says There’s an Elevated Risk of a Big Market Selloff (Bloomberg Markets)