After pricing its IPO at $ 17 a share, the owner of the popular disappearing - message app has a market value of roughly $ 24 billion, more than double the size of rival Twitter (twtr) and
the richest valuation in a U.S. tech IPO since Facebook (fb) five years ago.
All three boast extremely
rich valuations.
The main reason high prices foretell paltry gains is that
rich valuations make dividend yields smaller.
The blistering consensus: that in shopping itself at far too
rich a valuation and pretending to be more than it was, Wired Ventures fell victim to its own greed and famous arrogance.
The corollary to this level of
rich valuation is that our projection for 10 - year total returns for the S&P 500 is now just 5.3 % annually.
The considerations behind shifts in these market return / risk profiles should be clear - the strongest profiles emerge when a significant retreat in valuations is coupled with an early improvement in market internals; the weakest profiles emerge when overvalued, overbought, overbullish conditions develop or when
rich valuations are joined by broadening divergence or deterioration in market internals.
When you look back on this moment in history, remember that
rich valuations had not only been associated with low subsequent market returns, but also with magnified risk of deep interim price losses over shorter horizons.
Rich valuations are associated not only with weak future return prospects, but with unusually deep prospective losses in the interim.
I've long noted that the analysis of market action can help to overcome some of this frustration, as stocks have often provided good returns despite
rich valuations so long as market internals were strong, and the environment was not yet characterized by a syndrome of overvalued, overbought, overbullish, and rising yield conditions.
Risk - seeking investor preferences allow markets to be tolerant of
rich valuations and even bubbles, while a subtle shift to risk - averse investor preferences often signals an impending and catastrophic end to those valuation extremes.
One example, from a Dow Theory perspective, is to note the classic divergence or «non-confirmation» here — a high in the Industrials with the Transports lagging, coupled with
rich valuations and lopsided bullish sentiment.
But regardless of the answer, recognize that extremely
rich valuations will still be associated with dismal long - term expected returns.
«M&A activity globally is very high, which is common in the late stages of an equity bull market as both private equity and corporate owners look to cash in on
rich valuations,» Lait explains.
Along with falling yields, investors who want to buy income - producing stocks these days are facing
rich valuations.
As I emphasized last week, even if we had no concern at all about a second wave of credit strains, we would still be fully hedged here based on the present combination of
rich valuations, overbought conditions, overbullish sentiment, and hostile yield pressures.
It's important to distinguish between the level of valuations, which has indeed become breathtakingly extreme in recent years, and the mapping between valuations and longer - term market returns (which we observe as a correspondence, where
rich valuations are followed by poor returns and depressed valuations are followed by elevated returns).
Still, given the market's
rich valuation, one would have expected in advance that the Fund would be largely hedged, and to that extent, the Fund's hedging approach performed in 2006 basically as expected - it muted the impact of market fluctuations on the Fund, and contributed several percent in «implied» interest.
All rich valuations do is provide a window of opportunity for current holders to obtain a wealth transfer from buyers, but the only way to realize that is by selling.
With regard to the current market cycle, the period since 2000 has been unique in that it has reflected an environment of persistently
rich valuations.
While the blue valuation line showed relatively
rich valuations, actual market returns over the next 6 years were even worse than expected.
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.
In contrast,
rich valuations have produced far more tepid returns.
So despite periodic speculative runs,
rich valuations have an annoying way of ruining the fun.
On the other hand, both historically and even since 2009, when investors have shifted toward risk - aversion, as evidenced by divergent market internals,
rich valuations and fragile economic foundations have typically resulted in steep market losses.
But don't forget -
rich valuations, ultimately, are unforgiving.
Stocks have done well and are at
rich valuations not because they are appropriately priced, not because they deserve these valuations, but rather because investors have been in a speculative mood.
Investors need to get that story right because once the speculative merit goes away, it will be essential to recognize that nothing else can be expected to «save» the market from the consequences of
these rich valuations.
The «canonical» market peak typically features
rich valuations, rising interest rates, often a reasonably extended and «flattish» period where, despite marginal new highs, momentum has gradually faded while internal divergences have widened, and finally, an abrupt reversal in leadership, from a preponderance of new highs over new lows (both generally large in number) to a preponderance of new lows over new highs, with the reversal often occurring over a period of just a week or two.
Unfortunately,
rich valuations are unforgiving, as is simple algebra.
Longer - term, the market's
rich valuations on a variety of internals is already enough to anticipate fairly unsatisfactory returns for buy - and - hold investors in the major indices over the coming 5 - 7 years.
This despite the fact that the 2007 peak reflected
rich valuation multiples against earnings that were themselves inflated by abnormally elevated profit margins.
The anchoring of investor expectations to a period of
rich valuations and unusually wide profit margins may not be reasonable, but it prevents any ability to «forecast» a significant near term decline, much less a sustained downtrend.
That's not a «bearish call» on precious metals shares, but does reflect somewhat
richer valuations for precious metals than we saw a few weeks ago when those stocks were declining notably.
It is mainly a history of low yields being pressured higher - of thin risk premiums being pressured to widen - of
rich valuations being pressured lower.
Rich Valuations and Rising Yields are a Dangerous Combination John P. Hussman, Ph.D..
According to some neat supporting research from James Montier, the global equity strategist at Dresdner, Kleinwort, Wasserstein in London, the U.S. is hardly alone in
these rich valuations.
Short term advances on narrow breadth, dull volume and
rich valuations aren't terrible for us, but are far from ideal conditions.
DUBAI, May 1 - Saudi stocks slid 0.6 percent on Tuesday as concerns grew about
rich valuations for blue - chip stocks after the region's biggest stock market hit a more than a two - year high last week.
Whether or not you've had luck in the dating world this year, online dating site stocks have performed quite well in... Match Group Downgraded On
Rich Valuation
Within credit we prefer up - in - quality exposures and favor the U.S. over Europe, where
richer valuations mean lower income potential and higher sensitivity to interest rates.
Even if good growth is ahead, your stomach may not be able handle the ups and downs that come with owning a company that has such
rich valuations.
As of last week, the Market Climate for stocks remained in the most negative 0.5 % of all historical observations, and was characterized by
rich valuations, unfavorable market action, and a variety of hostile «Aunt Minnies» that are associated with poor subsequent returns.
Even if we observe
rich valuations, there can be some justification for accepting market risk during periods when market internals are uniformly strong, provided that the environment is not also characterized by a syndrome of overbought, overbullish and rising - interest rate conditions.
What Bernanke views as a «wealth effect» is simply
the richer valuation of existing cash flows that goes hand in hand with lower prospective returns in the future.
But even during post-credit crisis periods, some combinations of market conditions have warranted at least a moderate speculative exposure to market fluctuations despite
rich valuations.
Be Mindful of
Rich Valuations in Low - Volatility Stocks.
Worried that
rich valuations will mean low returns?
If that has happened, it's a mixed blessing: We may not get a big market decline — but, given today's
rich valuations, we also aren't likely to enjoy impressive long - run gains.
Given the extremely
rich valuations we've observed since the late - 1990's, and the fact that the S&P 500 has achieved very little net return over this period, our approach has been generally defensive.
Presently, deteriorating stock market internals suggest fresh skittishness among investors, which coupled with still -
rich valuations (on the basis of normalized earnings) often results in particularly negative outcomes for stocks.