At the end of 1996, Alan Greenspan, then chairman of the U.S. Federal Reserve, warned of "irrational exuberance" in markets.
And now it seems market valuations have caught the attention of one of his successors, current Chair Janet Yellen. In her mid-July testimony to Congress, Yellen warned that valuations in some areas were "substantially stretched".
But without changes in monetary policy, such comments do little to affect the outlook for markets.
With Yellen's focus still on attaining full employment, investors should regard the Fed as primarily supportive of the economic and market recovery underway in the U.S.
Furthermore, last week's strong second-quarter gross domestic product numbers will do little to change Yellen's course in the near term, and improved economic momentum should further support the case for risky assets like stocks.
Then, as now, Greenspan's speech about "irrational exuberance" came at a time when U.S. tech companies were on the rise and U.S. stocks were valued at 15.7 times their predicted earnings – only just above the current average for the past 25 years. However, Greenspan's comments proved premature: markets rose for more than three years after his speech.
Comments from powerful central bank heads like Yellen and Greenspan might be important if they subsequently led to tighter monetary policy. Greenspan preferred to deal with the consequences of a collapsed bubble than prick it himself. Yellen's focus on the slow recovery in the U.S. employment rate suggests she too would prefer to keep monetary policy loose even if this risks asset bubbles, rather than tighten too soon and risk jeopardizing job creation. Real interest rates are likely to remain negative in the U.S. for around two years.
This does not mean to say valuations of risky assets are cheap. Spreads between high yield bonds and Treasury yields are 3.77 percentage points, compared with the long-run average of close to 5 percentage points. However, high yield bond spreads are far from the lows of 2.5 percentage points seen in 2007. And while equities are trading slightly above historic averages, there is no historic evidence that such levels are stretched.
When valuations lie close to long-run averages, as they do today, other factors -- such as economic performance and corporate earnings growth -- are more important than valuations. Both are strong, as demonstrated by last week's U.S. GDP print, and the current S&P 500 earnings season, demonstrating 9 percent earnings growth at U.S. companies.
There is also still a good deal of money sitting in cash at negative real rates, waiting to move into riskier assets with higher potential returns. Just under 30 percent of assets invested with UBS Wealth Management are in cash. Our clients remain primarily concerned with market valuations and the disappointing pace of the global economic recovery since 2009. There is little talk of "this time is different" or a "new economy". It doesn't strike us as a market that is "exuberant" or "stretched".
To be sure, after the substantial gains of the past five years, investors should expect lower returns from both equities and high yield credit than they've had in the recent past. But valuations are not at extremes, nor are investors exuberant. With U.S. GDP growth still on track, the Fed remaining accommodative, and cash still on the sidelines, now is not the time for investors to head to the exit.
Mark Haefele is global chief investment officer at UBS Wealth Management, overseeing the investment strategy for $2.1 trillion in invested assets. Kiran Ganesh is cross-asset strategist at UBS Wealth Management. Follow UBS Wealth Management on Twitter @UBSemea