While certain high growth companies might be fairly valued at these levels, highly mature, low growth businesses like WD - 40 have no history of trading consistently at these sorts
of rich valuations.
As of last week, the Market Climate in stocks was characterized by a combination
of rich valuations, unfavorable market action, continued negative economic pressures on forward - looking indicators, and additional indicators (sentiment, credit spreads, etc) associated with a poor average return / risk profile in stocks.
Be Mindful
of Rich Valuations in Low - Volatility Stocks.
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.
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.
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.
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.
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.
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.
Not exact matches
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.
That means that Snap stock will be insanely expensive: At a $ 24 billion
valuation, Snap shares will have a price - to - sales ratio
of 59, making it far
richer than Facebook stock and other social media companies — and likely the most expensive tech IPO ever.
Based on a market
valuation of US$ 50 to US$ 104 billion (at the high end), check out how
rich Mark Zuckerberg, Bono and others will be when Facebook hits the open market.
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 friends at Wealth - X, a firm that does research and net - worth
valuations on ultra-high net worth individuals, compiled a list
of the
richest people in the world under 35.
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.
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.
But regardless
of the answer, recognize that extremely
rich valuations will still be associated with dismal long - term expected returns.
The state owns the land, but does not fully tax its rising
valuation or rent -
of - location that has made many families
rich.
«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.
To expect normal or above - average long - term returns from current prices is to rely on the market bailing out the
rich overvaluation
of today with extreme bubble
valuations down the road.
Last month, at the MarketCounsel Summit in Miami, during a panel discussion about advisory - firm
valuations,
Rich Gill
of Wealth Partners Capital Group cited what might be 2018's most bankable theme in the financial advice space.
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.
Our measures
of market action are still broadly unfavorable, and allowing even the mildest adjustment for profit margins and the position
of earnings in the economic cycle,
valuations remain
rich.
With
valuations very
rich, bullish sentiment high, and stocks generally overbought, there's a certain momentum to the market that makes it likely - in terms
of probability - that stocks will be higher in the weeks ahead.
Warren Buffett, the world's second -
richest man, distinguishes between periods
of comparatively high and low stock market
valuation.
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.
So despite periodic speculative runs,
rich valuations have an annoying way
of ruining the fun.
Netflix's stock
valuation has been a constant source
of debate for years, and currently is trading at a price - to - earnings (P / E) ratio
of 123x, which is
rich by almost every measure — no matter what kind
of business model it is.
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.
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.
Given
rich global stock market
valuations, slumping quality
of internal market action, and rising global interest rates, this is not an appropriate time to accept significant market risk.
This measure puts U.S. equity
valuations in the
richest quartile
of their history, as the blue line indicates in the chart.
This means that the high
valuation of science and education, so widespread across the world, is an expression
of the interests
of the
rich and powerful.
The encounter with the sacred and the
valuation of spiritual gifts over material
riches revives their sense
of security and personal value.
As far as top 20
richest clubs are concerned according to recent forbes
valuation, eight premier league clubs feature in top 20 and we might expect a few more in couple
of years time.
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.
This measure puts U.S. equity
valuations in the
richest quartile
of their history, as the blue line indicates in the chart.
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.
But given today's low interest rates (recently about 2.3 % for 10 - year Treasuries) and relatively
rich stock
valuations (Yale finance professor Robert Shiller's cyclically adjusted P / E ratio for the stock market recently stood at 29.2 vs. an average
of 16.7 since 1900), it would seem to strain credulity to expect anything close to the annualized returns
of close to the annualized return
of 10 % for stocks and 5 % for bonds over the past 90 years or so, let alone the dizzying gains the market has generated from its post-financial crisis lows.
An average bear market within a «secular» bear market period (a period generally about 17 - 18 years, where
valuations begin at
rich levels and achieve progressively lower levels over the course
of 3 - 4 separate bull - bear cycles) is about 39 %, and wipes out about 80 %
of the preceding bull market advance.
We'll start with the fact that there is [sic] essentially four kinds
of penny stock companies in the Pump & Dump world: (1) the kind where the management is in on the scam and is directly knowledgeable and complicit with the intent to deceive the public; (2) the kind where some poor schmoe has a great idea (at least he thinks it is) that requires financing, and becomes the mark
of a parasitic «funder» who makes all kinds
of promises
of unlimited monies and
riches beyond the mark's wildest dream; (3) the kind where the company is absolutely for real but the shares have been hyped (sometimes hijacked) into ridiculous
valuations; and, (4) a hijacked empty and inactive shell.
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.
Low - volatility strategies, already operating from a baseline
of low projected returns due to their currently
rich valuations, are particularly vulnerable to the impact
of trading costs.
But considering today's low interest rates and relatively
rich stock
valuations, I'd say it would be foolish to count on returns anything like those
of the recent past or, for that matter, even the roughly 10 % annual gains for stocks and 5 % for bonds over the past 90 or so years.