Not exact matches
Using the desire for investors to bid up stocks at ever - increasing
valuations, Higgins
sees this chart as indicating a comparatively subdued enthusiasm from stock market players
relative to what we
saw in the 1990s.
The
relative valuation between value and growth indices remains pretty extreme — within the widest quintile versus history,
see chart below.
Interestingly, when the
relative valuations between the U.S. and Canada fall to these levels (using data since 1987), we find that Canadian stocks have tended to hold up pretty well
relative to U.S. stocks over the following year (
see the chart below).
Not only were stocks looking modestly expensive versus history,
valuations were also full
relative to international markets, including the U.S. (
see the chart below).
The subsequent (and recent) small - cap rally beginning in 1999 began from a
relative valuation level not
seen in more than 25 years.
Not only were stocks looking modestly expensive versus history,
valuations were also full
relative to international markets, including the U.S. (
see the chart below).
Interestingly, when the
relative valuations between the U.S. and Canada fall to these levels (using data since 1987), we find that Canadian stocks have tended to hold up pretty well
relative to U.S. stocks over the following year (
see the chart below).
We can
see in Panel A that the ups and downs of the performance of the value portfolio
relative to the performance of the growth portfolio (the blue line) and the ups and downs of
relative valuation of value
relative to growth (the green line) fit like a glove.
The peaks in momentum's performance — when we
see the performance spikes and crashes — almost always coincide with peaks in momentum's
relative valuation.
It bears mention that Sanjoy Basu's seminal paper on the value effect appeared in 1977 after an extraordinary five - year run in which the value effect both delivered exceptional returns, following the collapse of the Nifty Fifty, and
saw an exceptional rise in
relative valuation to levels, at least on the basis of P / B, never
seen since.
Most investors will
see 2 - 5 specific periods in their investing lives where the
relative valuations favor more buying than selling.
A further indication of
valuation can be
seen by examining a company's current price to sales ratio
relative to its historical price to sales ratio.
But frankly speaking, this is an over-simplified way of
seeing whether the stock market is over-valued or not, and I'm not even done with talking about absolute
valuation nor begun to talk about
relative valuation.