Investors received the inflation data with great enthusiasm, causing stock indices to soar.
Is low inflation enough to reassure investors to the point where they say: "Now go!"?
If we look at history and identify periods in which American inflation exceeded the target, perhaps we can find signs of what could happen, serving as a starting point for our study.
When we analyzed the trajectory of inflation in the United States in September 2011, we observed that it was around 4% per year. However, in February 2015, it registered a significant reduction, reaching 0%. In this context, if we follow the current market reasoning , in which low inflation stimulates investors' appetite for riskier assets , we could expect there to be an appreciation of risky assets in the periods after 2011. Let's check.
S&P500 Chart Source: FRED
We observed that the investor who noticed the reduction in inflation and chose to invest in variable income in September 2011 purchased the S&P500 index at 1,200. This decision resulted in an appreciation of 75% in just 4 years, which represents a very positive performance. Given this history, the investor wants this pattern to be repeated in the current scenario.
Absence of a component: Value.
When we analyze various valuation metrics , it becomes evident that, at that time, a crucial value component was present in the market, which is absent in the current scenario. The stock market was cheap! For example, when considering the Total Market Capitalization to GDP metric in 2011, we noticed that this ratio was around 80%. Contrasting this perspective with the current economic situation , this same valuation index is now twice as high as it was at that time, resulting in an overpriced and riskier market for the investor.
Market Valuation metric graph.
Thus, we observe several similarities with the reference year, 2011. However, the lack of current intrinsic value amplifies the risks. If investors can again achieve a 75% return in 4 years, while we achieved 23% in Treasurys , I wouldn't be unhappy.