By Steve Blumenthal, CEO, CMG Capital Management Group
I highlighted three valuation measures earlier this month Click Here: one based on reported earnings through 12-31-2014, one based on operating revenue, and Warren Buffett’s favorite valuation indicator Stock Market Capitalization as a Percentage of Gross Domestic Income. The market is expensively priced. The problem is that when valuations are high, the probable forward returns are low. This doesn’t mean the U.S. equity market can’t go higher from here; but it does mean that risk is much higher.
With a 10-year Treasury yield touching 1.81%, the bond market is clearly telling us something. We are in a high debt, low growth trap. The world is fighting deflation. I have written a great deal about the coming currency wars and probable outcomes. Last week deflationary forces claimed their first “currency war” victim, Switzerland. This week European Central Bank (ECB) president Mario Draghi unveiled bigger-than-expected quantitative easing measures.
Essentially, I see it as advantage dollar and U.S. stocks and U.S. bonds for now. That puts the Fed into a challenging box. Six years of zero interest rate policy and a desire to move off that peg (for many reasons if not to test the ability of the markets to stand strong) will further accelerate the flood of global capital into dollar denominated assets.
For now, trend evidence remains favorable and “Don’t Fight the Fed” an important theme while risk is high. Broad portfolio diversification (that includes strategies that can tactically pivot between stocks and bonds) and an eye toward risk protection as risk management is, I believe, mandatory (despite how often your client may compare everything he has to the S&P). This is why you are so important to your clients’ long-term success. Volatility is picking up. We will be tested. Stand your ground.
Of course, finance is not the only industry concerned with deflation as we can read in this Yahoo! Finance story Deflation talk dominates on Wall Street and in the NFL.
See full story and important disclosures in Trade Signals – Extreme Pessimism (ST Bullish for Stocks), Trend Positive.
Steve Blumenthal is CEO and Chief Investment Officer of CMG Capital Management Group. CMG manages tactical portfolios and strategies for advisors, individuals, and institutions. The objective behind all of Mr. Blumenthal’s work is to help advisors build better portfolios by allocating with a long-term game plan that is risk sensitive and properly diversified. Mr. Blumenthal is a self-proclaimed “quant geek,” with an analytical mind for the markets that helps him connect with everyday investors and industry experts alike.
