00:00Osun Kwon of Wells Fargo trimming his year-end target to 7,700 from 7,950,
00:05writing oil has also been in the driver's seat for both stocks and bonds.
00:09Osun joins us now for more. Osun, good morning.
00:11Morning.
00:11What's the downside here? Still 5% to 10%?
00:14Yeah, that's what we're penciling in.
00:16And I'm usually in the camp that the level of interest rates doesn't really matter.
00:20It's really the volatility of rates.
00:22But if you look at the equity allocation today versus bond allocation,
00:26it's 72% versus 28%.
00:28It's at the highest level since 1969.
00:30And if you try to estimate what the fair equity allocation should be
00:34based on the cost of equity and the 5% interest rate,
00:38that number should be around 60%.
00:39So that 12 percentage point gap, that's the widest level since 1969 again.
00:46And that gap has usually explained how the S&P is going to do versus the risk-free rate.
00:52And if you assume like a 7% EPS growth over the next five years per year,
00:58that basically, that 12% basically implies 0% access return on top of that 5% risk-free rate
01:06for the S&P.
01:06So that's a pretty negative setup for equities overall.
01:10Let's talk about where we got to that negative setup.
01:12Is it because stocks are so good or bonds are so bad?
01:15It's really because of the allocation gap between the two.
01:19Stocks are good.
01:20You know, it's inflation protected.
01:22You know, earnings are still rising.
01:24But we're no longer in the 2%, 3% interest rate environment.
01:29We're firmly about 5% now.
01:31So the allocation right now is not reflecting the 5% interest rate word.
01:38And I think that's the risk, really.
