A whole generation of market participants has never experienced a true, prolonged downturn, having been conditioned to always 'buy the dip' in a central bank-supported environment. This lack of crisis experience could exacerbate the next real recession, as ingrained behaviors prove ineffective or harmful.
The current market isn't just an AI or tech bubble. It's an 'everything bubble' fueled by excess liquidity from monetary and fiscal policy, encompassing crypto, meme stocks, SPACs, and both investment-grade and high-yield credit.
The primary concern for private markets isn't an imminent wave of defaults. Instead, it's the potential for a liquidity mismatch where capital calls force institutional investors to sell their more liquid public assets, creating a negative feedback loop and weakness in public credit markets.
The massive capital expenditure in AI infrastructure is analogous to the fiber optic cable buildout during the dot-com bubble. While eventually beneficial to the economy, it may create about a decade of excess, dormant infrastructure before traffic and use cases catch up, posing a risk to equity valuations.
The top investment idea for the year is European equities, specifically quality stocks. This is based on a favorable combination of accelerating earnings growth, supportive fiscal and monetary policy, and more attractive valuations compared to US markets, particularly when analyzing EPS growth plus dividend yield versus P/E multiples.
The common wisdom to buy duration when the Fed cuts rates is lazy analysis. It's crucial to ask *why* the Fed is cutting. If cuts occur amidst a strong economy and persistent inflation, rather than a growth slowdown, investors should actually sell long-duration bonds.
While currently unattractive, a future, inevitable credit spread widening event (e.g., IG to 165-185 bps, HY to 600-800 bps) will kick off a five-to-ten-year 'golden age' for credit, where corporate bond returns could rival or even outperform equity markets.
Due to tight credit spreads, Richard Bernstein Advisors (RBA) has taken the unusual step of eliminating all corporate credit exposure from its portfolios. They favor agency mortgage-backed securities, which currently offer a similar or better yield without the associated corporate downgrade or default risk.