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.
Let’s take a look at current market valuations (high) and what they are telling us about probable 10-year forward returns (low). The stock market has had an outstanding five year run. With that, I believe, many individual investors have misguided expectations. The market is overvalued, over-believed and over-margined yet trend evidence remains positive and Don’t Fight the Fed an important theme. For now.
