So why look market -
level valuation measures?
Not exact matches
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 reasonable
valuation levels and largely solid financial position with reasonable debt
levels by most
measures.
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.
The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt
levels by most
measures and reasonable
valuation levels.
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.
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.
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.
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 present, the
valuation measures that we find best correlated with actual subsequent S&P 500 total returns are at the most offensive
levels in history, matching or eclipsing the 1929 and 2000 extremes.
Although Wall Street continues to assert that
valuations are «reasonable given the
level of interest rates,» keep in mind that the most reliable
measures of
valuation imply negative 10 - 12 year total returns for the S&P 500.
The recent market cycle has extended much further, but it has also brought the most historically reliable
measures of
valuation to obscene
levels.
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).
In our 1Q2015 letter, we noted that equity - market
valuations were at dangerous
levels by three different
measures: the CAPE ratio, the Q - ratio, and the Buffett indicator, which are discussed at length in our last letter.
Among the
valuation measures having the strongest correlation with actual subsequent market returns, current
levels are actually within 10 % of the March 2000 extreme.
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.
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.
That's fine, but understand that through most of the period prior to the 1960's, interest rates regularly visited
levels similar to the present, yet these same
measures of stock
valuations typically resided at well below half of present
levels.
The Fed might be able to stir things up next week, but despite the extremely high
level of the most valuable
valuation measures (CAPE, P / S...) and the weak market internals, the price action makes a break - out to new highs very likely here.
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.
This makes it a conservative
measure of market
valuation, so very high
levels properly merit concern.
The current
valuation of the S&P 500 is lofty by almost any
measure, both for the aggregate market as well as the median stock: (1) The P / E ratio; (2) the current P / E expansion cycle; (3) EV / Sales; (4) EV / EBITDA; (5) Free Cash Flow yield; (6) Price / Book as well as the ROE and P / B relationship; and compared with the
levels of (6) inflation; (7) nominal 10 - year Treasury yields; and (8) real interest rates.
On the basis of
valuation measures most tightly related to actual subsequent long - term market returns, we also estimate that the S&P 500 is likely to be lower 12 years from now, compared with current
levels, though dividend income may push the total return just over zero on that horizon.
His
measure of
valuation P / E10, which is the best that I have found so far, is still at 1929
levels, around 27.
Note that on the basis of this
measure, expected 12 - year S&P 500 total returns associated with current
valuation levels are negative, and even if one was to shift the blue line up somewhat closer to the red line in recent years, the associated return expectation would still be close to zero (which is what I actually expect based on MarketCap / GVA and other historically reliable
measures).
Today's
valuations, as
measured by P / E10, are twice the historically typical
level of 14 to 15.
Almost all of the factors and smart beta strategies exhibit a negative relationship between starting
valuation and subsequent performance whether we use the aggregate
measure or P / B to define relative
valuation.9 Out of 192 tests shown here, not a single test has the «wrong» sign: in every case, the cheaper the factor or strategy gets, relative to its historical average, the more likely it is to deliver positive performance.10 For most factors and strategies (two - thirds of the 192 tests) the relationship holds with statistical significance for horizons ranging from one month to five years and using both
valuation measures (44 % of these results are significant at the 1 %
level).
Low beta is the primary exception in our results, showing only one instance of statistical significance — at the 10 %
level for the two - year horizon (matching the half - life), using the blended
valuation measure — over the entire combination of horizons and two
valuation measures.
For instance, the blue dot on the value factor scatterplot suggests that prior to March 2016 the
valuation level of 0.14 — meaning the value portfolio was 14 % as expensive as the growth portfolio
measured by price - to - book ratio, and lower than the historical norm of 21 % relative
valuation — would have delivered an average annualized alpha of 8.1 % over the next five years.
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).
5, No. 2: pp. 54 - 63 DOI: 10.3905 / joi.5.2.54, also examined the link between equity returns at a market
level and
valuation measures.
My point is that there are a variety of highly predictive, methodologically distinct
measures of market -
level valuation (I used the Shiller PE and Tobin's q, but GNP or GDP - to - total market capitalization below work equally as well) that point to overvaluation.
FASB also clarified existing disclosure requirements relating to the
levels of disaggregation for fair value measurement and inputs and
valuation techniques used to
measure fair value.
For example, markets entered a period of extreme
valuation by many
measures in 1994 and continued to push higher for 6 more years before finally succumbing to
valuation levels that were, by some
measures, more than twice as high as any other period in history.
The inputs and
valuation techniques used to
measure fair value of the Funds» investments are summarized into three
levels as described in the hierarchy below:
And it's not just U.S. indexes like the Dow Jones Industrial Average and the S&P 500 that are at elevated
levels, other
measures of stock
valuations are at or near record highs.
The vast majority of analysts assume that if a
measure of
valuation (P / E, P / S, P / B, etc.) reaches some specific
level it means that:
Meanwhile, going into 2015, nearly every traditional
measure of
valuation (e.g, price - to - earnings P / E, price - to - sales P / S, CAPE PE10, Tobin's Q, market - cap - to - GDP, etc.) placed stocks at extremely overvalued
levels.