Tobias Carlisle of the famous value blog Greenbackd once studied the effect of trying to time the market based
on valuation indicators and showed that a fully invested portfolio outperformed portfolios -LSB-...]
Not exact matches
The good news from credit conditions, hiring intentions and capital spending plans
on the economy and likely earnings growth can provide upside appreciation potential while sentiment, intra-stock correlation and even
valuation suggest concern... Overall, we can get to a 1,975 kind of outcome, but we may also see choppier markets and early
indicators on volatility also intimate reasons to be worried.
A few days ago, I mentioned the a so - called «
valuation»
indicator derived by comparing the earnings yield
on the S&P 500 (based
on projected future earnings) with the 10 - year Treasury note.
On that basis, we can concede that when the
indicator spikes far out of its typical range,
valuations are probably skewed one way or another.
On the other hand, we think the worst stocks will be shunned by most investment disciplines and display expensive
valuations, poor technicals and deteriorating momentum
indicators.
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.
First, the «returns
on equities» here are typically taken to be earnings yields, which as we've frequently noted, are affected by cyclical variations in profit margins that make them notoriously poor
indicators of long - term prospective returns (see Two Point Three Sigmas Above the Norm and Margins, Multiples and the Iron Law of
Valuation).
I view
valuation on forward earnings as the single best
indicator of sentiment since it is dollar and trade - weighted.
For other investors, a careful study of the headline economic
indicators & local market
valuations will enhance risk / reward — for example, I focus particularly
on Vietnam as a highly attractive single - country opportunity.
While sentiment was consistent with a major top and
valuations,
on average, were definitely high enough to usher in a major top, an end to the long - term upward trend was not signaled by several important
indicators.
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.
We find that the Shiller - PE is a reliable long - term
valuation indicator for developed and emerging markets and we use the
indicator to predict real returns
on local equity markets over the next five to ten years.
The Paradox of the Zero Bound Subpar Economic Recovery Gets Premium Market
Valuation Wall Street Earnings Expectations Ignore Economic Divergences The Great Divergence An Update
on International Market
Valuations Business Cycles, Election Cycles, and Potential Risks An Update
on Valuations and Forward Earnings Assumptions Bond Yields, Earnings Yields, and Inflation A View from the NBER Recession
Indicators Three Observations
on Third Quarter Earnings Forward Looking Measures Still Don't Provide Evidence for a V - Shaped Recovery This Earnings Season, Watch Sales Forward Earnings Imply a Return to Near - Record Profit Margins Without Phoenix Stocks, Volume Continues to Contract Is the Job Market Ready for a Recovery?
The present environment is characterized by unusually overvalued, overbought, overbullish conditions, with rising 10 - year Treasury bond yields, heavy insider selling,
valuations on «forward earnings» appearing reasonable only because profit margins are more than 70 % above historical norms (fully explained by the negative sum of government and personal savings as a share of GDP), with the S&P 500 at a 4 - year market high, in a mature market advance, with lagging employment
indicators still positive but more than half of all OECD countries already in GDP contraction, Europe in recession, Britain
on the cusp, and the EU imposing massive losses
on depositors in order to protect lenders in an unstable banking system where Cyprus is the iceberg's tip.
Also, for the purposes of tracking, a 6 - 12 mth old
valuation will almost always still be a perfectly adequate
indicator of value (but I recommend you thoroughly update your
valuation on any stock before actually pulling the buy / sell trigger).
Pioneering analysts are now working hard to understand
valuations, and to write the book
on new key price
indicators.