Elevated CAPE (cyclically adjusted price-to-earnings) ratios indicating higher equity prices relative to earnings have persisted over the better part of last two decades, which raises the question of how much further can markets become overvalued.

Mixing large-cap stocks and corporate bonds together to create a “diversified portfolio” is a staple of traditional asset allocation models. However, the relationship between the two asset classes continues to shift unpredictably, constantly changing the level of risk exposure.

U.S. corporate buybacks have returned to their pre-pandemic levels as economic outlook continues to climb, decreasing the need for companies to hoard emergency cash reserves.

The Bloomberg Barclays U.S. Long Term Treasury Total Return Index is currently experiencing its largest drawdown to date, plummeting more than 20% as Long Term Treasuries continue to sell off amidst skyrocketing inflation expectations, lifting the U.S. 10 Year Treasury Yield to 1.74%.

Frothy equity valuations, in addition to the recent surge in treasury yields from historical lows, have resulted in the U.S. 10-Year Treasury Yield crossing above S&P 500 Dividend Yield, similar to the market environment back in 2016.

The rotation out of growth stocks and into value stocks continues to gain momentum in 2021, perpetuated higher due to concerns over rising inflation and frothy valuations in growth stocks.

As the U.S. 10-Year Treasury Yield continues to rise aggressively, recently crossing above 1.5% last week, it is important to note that similar rising yield environments in the past 10 years have led to pauses or corrections in the equity markets.

Persistent levels of monetary and fiscal stimulus continue to  incentivize investors to add credit risk to their fixed income portfolios, resulting in high-yield bond spreads dropping to their lowest level since before the global coronavirus pandemic began.

The demand for downside equity protection (via put options) versus upside participation (via call options) has fallen to a 20-year low as investors continue to aggressively add exposure without hedging their downside risk.

Market breadth appears to be waning as the percentage of S&P 500 members that are at 52 week highs has dropped significantly since its peak in November despite the S&P 500 posting new record highs.