Macro Risk of Mean Reversion in Overextended Markets

17 days ago

Lance Roberts

"When you look at returns over the last 15 years, we've run average returns 50% above norms. You can't sustain that forever, particularly when the economy is growing at 2%. When you're trading at two standard deviations or three or four from long-term means, that reversion becomes much more probable. Markets function on the balance between buyers and sellers, and if buyers stop paying higher prices, the market could quickly revert to levels around 6,200 or even lower in a recession."

This macro commentary outlines the risk that overextended markets, which have delivered returns well above historical averages, are likely to experience a reversion to the mean. The speaker emphasizes that when asset prices trade at extreme multiples relative to historical norms, a swift correction is probable, especially if buyer demand falters.