How Low Do We Go?
This is a correction, not a bear market
Our asset allocation model cannot get much more bearish. In our view the reason for the recent weakness has been the need for US equities to adjust to PE ratios in line with their long run average now that everything else – real interest rates, risk conditions and earnings growth – is also approaching its own average. We are less concerned about the prospect of a US recession, partly because we see no warning signs from the credit markets. Our model is unlikely to get more optimistic in the next six weeks, but this may happen just in time for Christmas.