The considerations behind shifts in these market return / risk profiles should be clear - the strongest profiles emerge when a significant retreat in valuations is coupled with an early improvement in market internals; the weakest profiles emerge when overvalued, overbought, overbullish conditions develop or
when rich valuations are joined by broadening divergence or deterioration in market internals.
Not exact matches
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.
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.
At the surface,
when we look at
valuation measures and other fundamentals and compare them to historical precedents, there is a case to be made that stocks (in particular in the US) are above fair value, if not
rich.
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.
On the other hand, both historically and even since 2009,
when investors have shifted toward risk - aversion, as evidenced by divergent market internals,
rich valuations and fragile economic foundations have typically resulted in steep market losses.
Similarly, market risk tends to be poorly rewarded
when market
valuations are
rich and interest rates are rising.
That's not a «bearish call» on precious metals shares, but does reflect somewhat
richer valuations for precious metals than we saw a few weeks ago
when those stocks were declining notably.
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.
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.
Typically,
when stocks trade at very
rich valuations, a slight misstep in a quarter can lead to a dramatic sell - off.
When investors use a
richer toolkit that combines past performance and current relative -
valuation levels, the decision will not always be to fire the winners and hire the losers, or vice versa.
This suggests that NTRs may offer a better option for investors who are concerned about
rich public REIT
valuations that may overstate underlying asset value, especially now,
when traded REIT prices are at historic highs and yields are near historic lows.