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Current High Valuations Suggest Low 10-Year Returns for Stocks

Posted on 09.06.16 |

Both professional and individual investors must recognize the relationship between risk and reward (i.e., returns).  Indeed, as fiduciaries, investment advisers are duty-bound to protect their clients’ interests and elevate them above their own.  We’ve been writing for some time that current market valuations are very high and, when the market is at these excessive levels, returns are typically reduced.

On August 31, the S&P 500 median price-to-earnings (P/E) ratio was 23.7.  (Think of “median P/E” (which is based on actual, reported earnings and current share price) as the middle P/E (250 stocks have a lower P/E and 250 have a higher P/E).)

9.2.2

I’ve shared the chart above previously.  It shows that returns are highest when the market is most favorably priced (low median P/Es) and lowest when the market is least favorable priced (high median P/Es).  We are in Quintile 5 today.  The next chart shows that not only were returns lowest when P/Es are high, like they are today, the risk is actually the highest.

9.2.3

In fact, some investment managers, are further lowering forward return expectations for equities.  GMO recently revised its real return forecast for large-cap equities to -3.2% from -1.9.

9.2.8

For charts, analysis, and commentary, see the rest of the story in On My Radar: Why? Because We Need the Eggs

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.

Categories: Tactical Investment Strategies Tags: Equities, On My Radar, PE, Steve Blumenthal, Stocks, Tactical Investing, valuations

High Valuations = Low Foward Returns

Posted on 04.17.15 |

Steve Blumenthal, CEO, CMG Capital Management Group

Steve Blumenthal, CEO, CMG Capital Management Group

Stock valuations are high, the financial media has been reporting lately. This is a topic  I examine frequently and it is the subject of my recent weekly commentary On My Radar.

Over the course of the first quarter, Standard and Poor’s lowered its forecast for 2015 earnings from $135 to $112 to $110 per share.  With prices already high relative to corporate earnings, such a trend is not an investor’s friend.

Let’s take a look at current valuations and see what they may tell us about the market’s return over the next ten years.  Hint: it’s very low.  Be prepared to adjust your sails.

The following chart, courtesy of Ned Davis Research, shows the market to be richly priced.  Median P/E is my favorite valuation indicator.

Read More >

Categories: Market Snapshot Tags: forward returns, On My Radar, PE, Steve Blumenthal, valuations

Week In Review

Posted on 07.11.14 |

Summer is HereThe big news of the week, of course, happened a few hours ago when LeBron James announced that he was taking his talents back to Cleveland. Now that the most important event in sports has been decided, we can examine the financial markets, which are not as clearly defined as the future of the King of Basketball.

This was a week when the high valuation of virtually everything has been examined and analyzed.  In his 7/7 article in The New York Times, Neil Irwin writes Welcome to the Everything Boom, or Maybe the Everything Bubble. Nearly every market and every asset class is highly valued according to historical standards.

What does that mean for an investor today?

Read More >

Categories: Portfolio Construction Tags: PE, Tail Risk Hedging

S&P Over/Under Valuation Price Targets

Posted on 03.07.14 |

Steve BlumenthalIn the following chart, we look at the median price to earnings ratio (PE) to get a sense of current valuation. Are U.S. equities, in general, inexpensively priced or expensively priced?  If we buy an inexpensively priced asset, there is greater future return potential.  Stating the obvious, if we pay too much, our return potential is more limited. Not a problem if you have a 20-30 year time horizon and the ability to stay the course when turbulence hits (2002, 2008, etc.). It is a problem when a major correction occurs just prior to your retirement.     

There are many ways to measure valuation.  I favor median PE for it is a mathematical process based on ACTUAL earnings.  History has shown that Wall Street analysts tend to over-estimate future earnings.  The challenge for those who favor forward earnings estimates to calculate PE is that there is a long pattern of those estimates subsequently being revised lower.  Thus, this is too much of a moving mark for me.

Read More >

Categories: Equities Tags: Equities, PE, Price Targets, Steve Blumenthal, Valuation

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