We don’t think that the valuations of many risky assets have become unsustainably high. This is because their rise has been supported by a structural decline in real interest rates, which is likely to endure. This decline has cut the prospective return from “risk-free” assets and, in our view, driven the equilibrium valuations of risky assets above the long-run averages with which they are often compared. With this in mind, we believe that investors’ exuberance for such assets is rational. Admittedly, we think that the upside for risky assets is limited and that a pull-back is likely in some cases. But a big cyclical correction is unlikely before 2019, when the US economy may be faltering.
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