Strategy Video: An Increasing Dependency on Capital Gains Undermining Stability
• There are two types of market returns to be made: 'capital gains' and 'income'
• When both sources of investment returns rise, it generally supports a stable and strong climb in assets
• In current conditions, the reach for 'reward' has hit extreme levels and is dependent on 'capital gains'
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We participate in the market with the anticipation of significant financial reward. There are two general sources of such returns: regular income paid from financial assets (dividends, coupons, carry) and the capital gains earned through adjustments in market value. Normally, when the expected income to be earned on financial assets rises; the value of assets will also increase. When one falls, they typically both fall. Nowadays, the backdrop for earning a return for accepting the risks we hold for market participation is very different than where it has been historically. Yield income is extremely low and has gained little-to-no ground from the Great Financial Crisis. Meanwhile, the asset prices have soared as investors have scrambled for capital gains. Yet, that disparity contributes to an increasingly unstable backdrop to our financial markets. How do returns represent a risk moving forward. We discuss that in today's Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.