At the beginning of each month, I like to look at equity market valuations. The stock market moved higher in April, yet for the fourth quarter in a row, corporate earnings were down. The good news about market valuations is that they can tell us a great deal about the annualized returns we are likely to get over the coming 10 years. The bad news is they tell us little about returns over the coming two years.
Buy low — sell high, they say. Pretty simple actually, but not many can actually do it. This is where valuations can help us get centered. Below I provide examples from several periods – low valuations in February 2009 and the great gains since.
Valuations were high in 2000 and 2007 and, as you will see, the subsequent returns from those starting points were not good. There were some better entry points, like in early 2009 but, really, who do we know that bought back into stocks then? It was pure panic, margin calls and forced liquidations. I wrote a piece that prior December entitled, “It’s So Bad It’s Good.” I didn’t get many positive responses.
Yet, here we are today — valuations are now higher than they were in 2007. As you will see on the coming chart, they are higher than every other period in time with the exception of time surrounding the great tech bubble.
We are getting more than a few “you didn’t beat the market” phone calls like I’m sure you are getting as well. The reality today is much like 1999 and 2007, far too many investors with false confidence in hand are buyers – not sellers. Cited are the returns of the market over the last handful of years. Behaviorally, this feels hauntingly similar to those prior cyclical peaks. Lessons not learned.
I have been writing about the global overcapacity glut in the last several letters. Let’s pass on that, let’s pass on the debt mess, let’s pass on underfunded pensions and let’s pass on the Fed. Valuations do matter, so let’s go there.
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.