Sentences with phrase «subsequent market returns»

Regardless of whether an analyst claims that stocks are cheap or expensive, they should be expected to provide some sort of evidence that their methods have a strong relationship with subsequent market returns.

There is not a single measure we've identified across history that has a stronger correlation with actual subsequent market returns, though several similarly accurate measures have comparable implications.

As I've detailed previously, when earnings - based measures are used to explain subsequent market returns, the embedded profit margin almost always carries as much impact as P / E itself.

Notice that to the extent that high interest rates were typically associated with depressed market valuations, they were also typically associated with elevated subsequent market returns.

One way to assess broad market value and expected returns is to look at a relative valuation measure and track subsequent market returns.

That said, my sense is that despite the clear relationship with actual subsequent market returns, the reality isn't quite as alarming.

These measures have maintained correlations near 90 % and higher with subsequent market returns, across history, and across interest rate regimes.

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.

Anytime you hear an analyst say that the «equity risk premium» is high, demand that they show you the actual performance of their measure versus subsequent market returns, ideally over decades of market cycles.

From the standpoint of long - term asset pricing, the reliability of these measures in estimating subsequent market returns has not deteriorated a bit in recent cycles.

In fact, one can show that valuations tend to be best correlated with subsequent market returns over periods representing roughly 0.5, 1.5 or 2.5 typical market cycles (see my 2014 Wine Country Conference presentation, A Very Mean Reversion, for details).

To understand this, investors need to ground themselves in exactly how reliable valuations - based on smooth, low - variability fundamentals - have been in explaining subsequent market returns throughout history.

On the measures we find most tightly correlated with actual subsequent market returns across history, the S&P 500 is now between 150 % and 170 % above valuation norms that have been approached or breached over the completion of every market cycle in history, including the most recent one.

It can not be stressed enough that the Fed Model destroys the information that earnings yields provide about subsequent market returns.

Our perspective is straightforward: on the basis of measures that have been reliably correlated with actual subsequent market returns in market cycles across a century of data, we estimate that the S&P 500 Index will be no higher a decade from now than it is today.

The correlation is negative because higher valuations imply lower subsequent market returns.

Market cap / GVA including financial companies is equally correlated with subsequent market returns (92 %), despite modest differences between the two measures, but implies slightly more negative total returns.

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.

While there is a general tendency for high interest rates to be associated with depressed valuations and above - average subsequent market returns, and for low interest rates to be associated with elevated valuations and below - average subsequent market returns, the relationship isn't extremely reliable or linear.

This adjustment has historically been important, as adjusting for that embedded profit margin significantly improves the relationship between the CAPE and actual subsequent market returns (something we can demonstrate both with algebraic return estimates and regression models — see Margins, Multiples, and the Iron Law of Valuation).

While our Margin - Adjusted CAPE has a very slightly lower correlation with actual subsequent market returns than our preferred measure (MarketCap / GVA), the available data history is longer.

While earnings are required in order to produce future cash flows, the fact is that S&P 500 earnings have historically been more volatile than stock prices themselves, and even smoothed or «forward» earnings measures produce valuation multiples that are rather weakly correlated with actual subsequent market returns.

Valuations are enormously useful in projecting long - term and full - cycle market outcomes, but even a century of evidence about properly discounted cash flows and their relationship with subsequent market returns is not enough.

Indeed, even Robert Shiller's cyclically - adjusted P / E (CAPE) is much better correlated with actual subsequent market returns, across a century of market cycles, when we account for the profit margin embedded in the 10 - year average of earnings.

Notably, the relationship between the Margin - Adjusted CAPE and actual subsequent market returns is more reliable than for the raw Shiller CAPE.

Recent cycles provide no evidence of deterioration in the relationship between reliable valuation measures (particularly those that aren't highly sensitive to fluctuations in profit margins) and actual subsequent market returns.

Finally, the points where the X-axis is positive show the relationship between monetary easing and subsequent market returns.

Notice that the positive relationship between monetary growth and subsequent market returns (a coefficient about +0.4) is weaker than the negative relationship -LRB--0.6) that initiated the monetary easing in the first place.

For that reason, the measures best correlated with actual subsequent market returns are those that are less subject to those cyclical variations.

That's fairly close to our own estimate of about 2.4 % based on a broad range of alternative measures that are highly correlated with actual subsequent market returns.

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 the basis of normalized profit margins (which improves the relationship of the CAPE with actual subsequent market returns), the margin - adjusted CAPE was 41 at the 2000 bubble peak, and is above 38 today.

I've previously demonstrated that the correlation of the Shiller cyclically - adjusted P / E (CAPE) with subsequent market returns is substantially strengthened by considering its embedded profit margin (the denominator of the CAPE divided by S&P 500 revenues).

Put simply, my expectation is that investors will find 10 - 12 years from today that the relationship between valuations and actual subsequent market returns has played out exactly as it has across history.

For historical evidence and mathematical formalization of this, see Rarefied Air: Valuations and Subsequent Market Returns.

It is then straightforward to calculate objects such as the Fed Model (the ratio of the forward operating earnings yield to 10 - year Treasury yields), and to demonstrate that it has zero correlation with subsequent market returns.

If you review that weekly comment, it should be clear that the relationship between the Fed Model and subsequent market returns is surprisingly weak.

We emphasize «historically reliable» because as in every bubble, there are numerous popular measures with quite poor correlation with actual subsequent market returns that Wall Street can offer to convince investors that valuations are just fine.

We know from a century of evidence on complete market cycles that the most reliable valuation measures (based on their correlation with actual subsequent market returns) are actually those that mute cyclical variations in profit margins.

Finally, the chart below shows the interaction between the raw Shiller P / E and the embedded profit margin in determining actual subsequent market returns.

See Rarefied Air: Valuations and Subsequent Market Returns to understand why we use log scale here.

It would be nice, before quoting alternative valuation models, if Wall Street analysts would at least present similarly broad historical evidence that their methodology actually has a relationship with subsequent market returns.

It is then straightforward to calculate objects such as the Fed Model (the ratio of the forward operating earnings yield to 10 - year Treasury yields), and to demonstrate that it has zero correlation with subsequent market returns.