While we often have very strong views about long - term and full - cycle market outcomes (based
on valuation measures that we find strongly correlated with those outcomes in market cycles across history), we rarely have pointed short - term market expectations.
Overall, the Canadian dividend stock market hasn't changed much since last year based
on these valuation measures.
On valuation measures most strongly correlated with actual subsequent S&P 500 nominal total returns, we presently expect negative total returns for the S&P 500 on a 10 - year horizon, and total returns averaging only about 1 % annually over the coming 12 - year period (chart).
On valuation measures most reliably correlated with actual subsequent market returns (a test that is never imposed on popular measures), current valuations now exceed 1929 levels.
Based
on the valuation measures most strongly correlated with actual subsequent total returns (and those correlations are near or above 90 %), we continue to estimate that the S&P 500 will achieve zero or negative nominal total returns over horizons of 8 years or less, and only about 2 % annually over the coming decade.
Last week, the U.S. equity market climbed to the steepest valuation level in history, based
on the valuation measures most highly correlated with actual subsequent S&P 500 10 - 12 year total returns, across a century of market cycles.
At this point, obscene equity valuations are already baked in the cake
on valuation measures that are reliably correlated with actual subsequent stock market returns.
Not exact matches
Because when you actually look at the relationship across sectors, and you look at their
valuations based
on return
on equity, or other
measures, all sectors seem to be about fairly valued.
The Hang Seng China AH Premium Index, which
measures the
valuation gap for companies listed
on both mainland exchanges and in Hong Kong, is near its highest level since March 2009, indicating a widening disconnect.
The company's strengths can be seen in multiple areas, such as its revenue growth, reasonable
valuation levels, largely solid financial position with reasonable debt levels by most
measures and notable return
on equity.
The company's strengths can be seen in multiple areas, such as its reasonable
valuation levels, expanding profit margins, largely solid financial position with reasonable debt levels by most
measures and notable return
on equity.
Our long - term forecasts are based
on our assessment of current
valuation measures, economic growth and inflation prospects, as well as historical risk premiums.
When you look back
on this moment in history, remember that spectacular extremes in reliable
valuation measures already told you how the story would end.
When
valuations exceeded even 12 times normalized earnings (
on our most comprehensive
measure discussed above), seemingly «favorable» market action was followed by profound losses averaging -69.8 %
on an annualized basis (generally reflecting a few weeks of vertical losses until enough damage was done to kick the market action
measures negative).
Moderate interest rates were associated with a whole range of subsequent returns over the following decade, and we know that those outcomes were 90 % correlated with the level of
valuations at the beginning of those periods (
on reliable
measures such as market cap / GDP, price / revenue, Tobin's Q, the margin - adjusted Shiller P / E, and others we've presented over time - see Ockham's Razor and the Market Cycle).
Along with the steepest equity
valuations in U.S. history outside of 1929 and 2000 (
on measures that are actually reliably correlated with subsequent market returns), private and public debt burdens have reached the most extreme levels in history.
«
On the other hand, using the same essential
measures of
valuation and market action, but including periods of major economic dislocation into the dataset, produces average return / risk inferences that are substantially less favorable.
It turns out that he is still right, and the effect of being right is that equities are far more overvalued than may be evident even
on measures like the Shiller CAPE (see An Open Letter to the FOMC: Recognizing the
Valuation Bubble in Equities).
In the face of constant cheerleading in 2000 based
on theories and
valuation measures that were historically unfounded, I wrote in February of that year:
As a result, starting
valuations,
on historically reliable
measures, are 90 % correlated with actual subsequent 10 - year total market returns.
Only with a real grasp
on the true cash flows of the business can one get an accurate
measure of the future cash flow growth implied by the stock's
valuation.
--
on this
measure of startup
valuations and exits, Barcelona's ecosystem is 56 percent larger than the global median.
Presently, wicked
valuations are coupled with still - unfavorable market internals
on our
measures, and have now been joined by the most extreme «overvalued, overbought, overbullish» syndrome of conditions we identify.
The economic gains and market returns that emerged during the Reagan Administration began from a starting point of 10.8 % unemployment, a current account surplus, and market
valuations that -
on the most historically reliable
measures - were less than one - quarter of present levels.
On nearly every measure - sentiment, valuation, volatility, oversold conditions, and others, we are observing extremes associated with strong expected return / risk profiles, on average.&raqu
On nearly every
measure - sentiment,
valuation, volatility, oversold conditions, and others, we are observing extremes associated with strong expected return / risk profiles,
on average.&raqu
on average.»
With the S&P 500 within about 8 % of its highest level in history, with historically reliable
valuation measures at obscene levels, implying near - zero 10 - 12 year S&P 500 nominal total returns; with an extended period of extreme overvalued, overbought, overbullish conditions replaced by deterioration in market internals that signal a clear shift toward risk - aversion among investors; with credit spreads
on low - grade debt blowing out to multi-year highs; and with leading economic
measures deteriorating rapidly, we continue to classify market conditions within the most hostile return / risk profile we identify — a classification that has been observed in only about 9 % of history.
That recognition might have encouraged a greater weight
on trend - following
measures versus fundamentals,
valuations, price - volume sponsorship, and other factors.
The Market Climate remains
on a Crash Warning, characterized by extremely unfavorable
valuations, unfavorable trend uniformity, and hostile yield trends, particularly long - term bond yields and various
measures of risk premiums.
By March 2000,
on the basis of historically reliable
valuation measures, I projected that a retreat to normal
valuations would require an -83 % plunge in tech stocks.
Finally, Chinese stocks (
measured by the Shanghai Stock Exchange Composite Index) have trailed their Brazilian counterparts (
measured by the Ibovespa Index) and moved in lock step with Russian equities (represented by the MICEX Index) since late January, based
on Bloomberg data, and their low
valuations are poised to potentially rise in a risk -
on environment.
With all due respect, if there is no way to come up with a value for gold itself aside from where it's currently trading, you're
on shaky ground using its
valuation to fundamentally
measure some other thing that is only vaguely analogous.
The most reliable
measures of individual stock
valuation we've found are based
on formal discounted cash flow considerations, but among publicly - available
measures we've evaluated, price / revenue ratios are better correlated with actual subsequent returns than price / earnings ratios (though normalized profit margins and other factors are obviously necessary to make cross-sectional comparisons).
Again, the problem is that market
valuations are presently more than double those norms
on the most historically reliable
measures.
In an attempt to cast light
on this issue, my colleagues at Plexus Asset Management have updated a previous multi-year comparison of the price - earnings (PE) ratios of the S&P 500 Index (as a
measure of stock
valuations) and the forward real returns (considering total returns, i.e. capital movements plus dividends).
Despite my admitted stumble in the half - cycle since 2009, it's perplexing that the equity market is at the second greatest
valuation extreme in the history of the United States,
on what are objectively the most durably reliable
valuation measures available, but it has somehow become an affront to suggest that this will not end well.
Our actual expectation is that the completion of the current market cycle is likely to wipe out the entire total return of the S&P 500 — in excess of Treasury bill returns — all the way back to roughly October 1997; an outcome that would require a market retreat no larger than it experienced in the past two cycles, and that would not even carry historically reliable
valuation measures to materially undervalued levels (see When You Look Back
On This Moment In History).
Wall Street analysts love to
measure the stock market based
on various price metrics, performance metrics and
valuation metrics.
Nolte added that despite concerns about the
valuation of the FAANG stocks, something he noted has persisted for years with little impact
on the stock prices, the group's prospects remained strong by many
measures.
With the top stock analysis software behind you, you can leverage our DCF models to quickly and precisely
measure the impact of your forecasts
on a stock's
valuation.
As usual, I don't place too much emphasis
on this sort of forecast, but to the extent that I make any comments at all about the outlook for 2006, the bottom line is this: 1) we can't rule out modest potential for stock appreciation, which would require the maintenance or expansion of already high price / peak earnings multiples; 2) we also should recognize an uncomfortably large potential for market losses, particularly given that the current bull market has now outlived the median and average bull, yet at higher
valuations than most bulls have achieved, a flat yield curve with rising interest rate pressures, an extended period of internal divergence as
measured by breadth and other market action, and complacency at best and excessive bullishness at worst, as
measured by various sentiment indicators; 3) there is a moderate but still not compelling risk of an oncoming recession, which would become more of a factor if we observe a substantial widening of credit spreads and weakness in the ISM Purchasing Managers Index in the months ahead, and; 4) there remains substantial potential for U.S. dollar weakness coupled with «unexpectedly» persistent inflation pressures, particularly if we do observe economic weakness.
Owing to the economic strength of the late 1990's, the least extreme
valuation measures were based
on earnings.
To quote
valuations on any other
measure in recent years would have led many readers to extremely bearish conclusions.
Since
valuation is something I've never overlooked, the periodic challenges I've encountered in the past three decades have invariably centered
on measures of market action.
On the basis of the most reliable
valuation measures we identify (those most tightly correlated with actual subsequent 10 - 12 year S&P 500 total returns), current market
valuations stand about 140 - 165 % above historical norms.
Put simply, when
valuation measures are steeply elevated but investors remain inclined to speculate, as evidenced by very broad uniformity of market action and the absence of internal divergences, rich
valuations often have little effect
on market outcomes.
Again, if our
measures of market internals were to improve, we would allow for the possibility that reliable
measures of market
valuations could surpass their 2000 extreme, and we would not place a «cap»
on how high stock prices could move.
On a wide range of historically reliable
measures (having a nearly 90 % correlation with actual subsequent S&P 500 total returns), we estimate current
valuations to be fully 118 % above levels associated with historically normal subsequent returns in stocks.
Instead, they've run their finances conservatively enough that they can sit
on depressed
valuations for years at a time, knowing that they are still earning a good rate of return when
measured as the cash flow that belongs to them relative to the price they paid for their ownership stake.
As of last week, the Market Climate for stocks was mixed -
valuations remain unfavorable, technical action was mixed but tenuous, with various indices flirting with widely observed levels of support and resistance (e.g. the 1100 level
on the S&P 500), while leading
measures of economic activity remain decidedly unfavorable.
U.S. equities are currently trading near the top end of their long - term
valuation range, based
on the price - to - earnings
measure.