By one closely watched
measure of valuation, Alan Greenspan's irrational exuberance warning should be keeping investors near the sell button.
«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.
While a number of simple
measures of valuation have also been useful over the years, even metrics such as price - to - peak earnings have been skewed by the unusual profit margins we observed at the 2007 peak, which were about 50 % above the historical norm - reflecting the combination of booming and highly leveraged financial sector profits as well as wide margins in cyclical and commodity - oriented industries.
It's common to object to the dividend yield as
a measure of valuation, given that companies have devoted more of their earnings to stock repurchases than dividend payments in recent years.
Second, our own admitted difficulty in the advancing period since 2009 did not reflect a shortfall in either
our measures of valuation or our measures of market internals.
This does not, for even a moment, change the fact that the most reliable
measures of valuation are now an average of 3.0 times their historical norms.
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.
As Graham and Dodd wrote in Security Analysis (1934), referring to the final advance that led to the 1929 market peak, the reason investors shifted their attention away from historically - reliable
measures of valuation was «first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.»
Because as investors if you're looking at this current contemporary global macroeconomic backdrop from the 10 - 12 year perspective, I find it with the typical disclosure here that I'm not able to see with a perfect crystal ball or anything but it's hard to believe that traditional assets, that global equities, will be thriving in this environment just from the simple perspective of how overstretched they are from any reasonable
measure of valuation.
In my view, the necessary objective is to accept market risk when the likely return / risk profile is attractive, based on observable
measures of valuation and market action, and to avoid, hedge, or diversify away those risks that don't carry attractive return / risk profiles on average.
For instance, across our nine
measures of valuation (none of which include bonds) the US appears to be 54 % overvalued.
The measures of valuation and market action that define each «Market Climate» are factors that can be tested in decades of historical data, are objective, observable, and have strongly affected the average profile of return and risk in the markets over time.
Current, objective
measures of valuation are already enough to support that conclusion.
Stock Strategies The Importance of Book Value Why the price - to - book ratio is the most effective
measure of valuation.
The relative dividend yield is
a measure of valuation.
It has been our most successful
measure of valuations for calculating Safe Withdrawal Rates so far.
His measure of valuation P / E10, which is the best that I have found so far, is still at 1929 levels, around 27.
There are several good choices for
the measure of valuation.
Book value is considered a better
measure of valuation than earnings by many investors including legendary investor Martin Whitman.
Dividend yield defines one
measure of valuation.
Since traditional
measures of valuation are broadly overvalued, analysts who are recommending additional equity exposure tend to use P / E ratios based on future estimates for operating earnings.
Based on Professor Robert Shiller's
measure of valuation P / E10, today's valuations are almost identical to those just before the Great Depression and higher than those of the worst time financially for starting retirement, the late 1960s.
[I have found Professor Robert Shiller's P / E10 to be the best single
measure of valuation so far.
Both the gross profitability and simple value B / P factors provide an interesting conundrum, appearing stretched on one
measure of valuation but less so on the other.
I have found Professor Robert Shiller's P / E10 to be the best single
measure of valuation so far.
Early researchers did not attempt to find
a measure of valuations, nor did they seek to exploit such a measure.
OAS is a common
measure of valuation for corporate bonds.
Professor Robert Shiller's P / E10 is an excellent
measure of valuation for this purpose.
Satisfactory
measures of valuation include P / E10, P / D10 and Tobin's q. NOTE: You can use the Stock Return Predictor to convert P / E10 into current S&P 500 prices.
(P / E10 is
a measure of valuation.)
If you are to make really big money in the stock market, resign yourself to the fact that just about everything you buy, if you are buying stocks correctly, will seem too high priced by just about any traditional
measure of valuation.
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:
Satisfactory
measures of valuation include P / E10, P / D10 and Tobin's q.
This is the best
measure of valuation that I have found so far.
The value of x is the percentage earnings yield 100E10 / P (or 100 / [P / E10]-RRB-, where P / E10 is Professor Robert Shiller's
measure of valuation.
Enterprise Value is often cited as a better
measure of valuation than Market Capitalization.
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.
Not exact matches
So if we look at a range
of market
valuation measures, whether it's Shiller CAPE, whether its price - to - book, whether it's price - to - trailing earnings, price - to - peak earnings, when we look at these
measures, they look like they're in the, what we would call, the 10th decile, meaning generally,
valuations are cheaper 90 %
of the time.
Since 1980, tech companies have gone public with average price - to - sales ratios
of 5.8, so by that
measure valuations aren't out
of whack.
Price: The price
of an opportunity can be
measured by the expected ROI and the relative
valuation of the company compared to similar alternatives.
Given that
valuations were already rich when the VIX, a commonly used
measure of S&P 500 volatility, was at 10, a doubling
of volatility suggests stocks should be trading closer to 16 or 17 times earnings, not 21.
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
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).
This is done by indexing property
valuations (typically provided at the time a loan is originated) by a
measure of housing prices and accounting for offset balances.
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 problem is when investors adopt theories and models that embed the most optimistic assumptions possible, run contrary to historical evidence, or embed subtle peculiarities that actually drive the results (see, for example, the «novel
valuation measures» section
of The Diva is Already Singing).
As always, the strongest prospective market return / risk profile is associated with a material retreat in
valuations followed by an early improvement in broad
measures of market internals.
The results below are specific to methods we actually use, but I expect that they could be broadly replicated using any basic combination
of valuations (say, Shiller PEs), and market action (say, moving averages or breadth
measures).