Municipal bonds and emerging markets have not seen the same rally as U.S. stocks and may hold a greater risk premium, Vanguard Chief Economist Joe Davis says.


It’s a question that’s harder to answer today than has been in the past. And I think that’s in
part because the expected returns for riskier portfolios has come down at the margin and
also the considerable amount of cash flow we’re seeing into those very investments.

I think those areas where perhaps we have not seen such a compression in risk premiums
are areas that sometimes, quite frankly, may have been in the headlines negatively—in
the bond market, potentially in the municipal bond market where they have not performed
as strongly as say the corporate bond market, and then in the equity market, it’s perhaps
overseas markets and emerging markets which could still be in store for some volatility
in 2014 to be sure—but, again, relative to their U.S. counterparts, have underperformed

I think, most importantly, those investors and advisors who are pursuing a diligent
rebalancing strategy are very likely already following those sorts of perspectives that
I just mentioned.