July 8 (Reuters) – The past 15 years of bubbles and busts
notwithstanding, sometimes it may be best to just assume
financial markets have got it right.
The central problem facing investors today is how to
reconcile patchy and uneven growth in the economy with very full
valuations for stocks and other risky assets.
What has been a constant tension over the past five years,
during which U.S. stocks have more than doubled, was highlighted
yet again last week when decent but not outstanding U.S. jobs
figures (wage growth for example was poor) prompted investors to
underwrite yet another stock market run to record territory.
In trying to figure out why financial markets are doing so
well and risk is so well bid, there are two broad competing
The first explanation is that financial markets are ahead of
the curve. In this reading a stronger recovery which will
justify rich valuations is just around the corner. If true,
companies will see revenues jump along with overall economic
growth, and margins with them, prompting a new round of
investment in capacity and allowing for the vast majority of
recently made risky loans to be repaid.