Advisors are wondering: What percentage of equity should I hold in my client portfolios? How frothy is this market? Is it time to get more defensive?
The short answers: this market is expensive – stay cautious. Hedge long-term equity exposure.
How do we realize this? On the chart below, the table shows stock market performance six-months to five years after over- or under-valuation is reached.
In the bottom clip, note the S&P’s current price to its Normal Valuation Line (dotted red middle line) and the zones that identify valuations to be “overvalued” or “undervalued”. The yellow circle identifies current valuation. The idea is to get a sense of a market that is above or below its normal valuation. When the S&P 500 is 20% above its normal valuation, we consider it overvalued; at 20% below normal we consider it undervalued.