Arnott, Beck, and Kalesnik (2016a, b) and Arnott et al. (2016) empirically demonstrate that strategies
with rich valuations tend to provide poor subsequent performance.
One example, from a Dow Theory perspective, is to note the classic divergence or «non-confirmation» here — a high in the Industrials with the Transports lagging, coupled
with rich valuations and lopsided bullish sentiment.
Not exact matches
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.
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.
Rich valuations are associated not only
with weak future return prospects, but
with unusually deep prospective losses in the interim.
But regardless of the answer, recognize that extremely
rich valuations will still be associated
with dismal long - term expected returns.
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.
Along
with falling yields, investors who want to buy income - producing stocks these days are facing
rich valuations.
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.
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.
Equity
valuations may look
rich compared
with history, but we do not believe this is something to be feared, as we write in our new Global equity outlook Goldilocks and the
valuation bears.
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.
Once
valuations are
rich and our broad return / risk estimates are negative, our willingness to accept market risk generally requires a window
with two exits — one below, at the point where the trend - following measures deteriorate, and one above, at the point where overvalued, overbought, overbullish conditions emerge.
The encounter
with the sacred and the
valuation of spiritual gifts over material
riches revives their sense of security and personal value.
Even if good growth is ahead, your stomach may not be able handle the ups and downs that come
with owning a company that has such
rich valuations.
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.
Still,
valuations are easily
rich enough to produce disappointing returns,
with significant volatility, over the coming decade.
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.
Equity
valuations may look
rich compared
with history, but we do not believe this is something to be feared, as we write in our new Global equity outlook Goldilocks and the
valuation bears.
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.
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.
But by combining factor
valuation with past performance, investors gain a
richer toolkit for making well - informed allocation decisions among smart beta managers.
John Hussman at Hussman funds is careful to qualify the value of this analysis: «
Rich valuation is strongly associated
with weak subsequent returns, but only reliably so over periods of 7 - 10 years.
Since then, however, performance has reversed, as stocks
with lower
valuations gained nearly 3 % while their
richer counterparts gained 1 %.
Valuation - Informed Indexing is Buy - and - Hold
with the Get
Rich Quick element (the idea that you don't need to look at the price at which stocks are selling before putting money on the table) deleted.
All that
Valuation - Informed Indexing is is Buy - and - Hold
with the Get
Rich Quick element removed.
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