Is this market overvalued… or have valuations actually reached a “new era”?
via Profit Margins: The Epicenter of the Valuation Debate.
It’s my opinion that a combination of increased availability of information (the internet), and falling wages and rates since the 80’s/90’s have pushed valuations to a new normal that is higher than historical norms would suggest. I do believe we will witness margin compression as wages and rates rise sometime in the future (sooner than later hopefully)… however, IMO, this would be a short-term issue that would self-correct as demand increases due to increased wages and yields. This would push revenue and earnings higher regardless of moderate margin compression.
Great read. Take a look when you can and share with your buddies.
Did everyone just re-write history by forgetting we had a 20% correction (i.e. end of a bull market) in the fall of 2011 on a intra-day basis? Granted, this was on the heels of a downgrade on US debt and mainly a politically driven drop… but it did happen, didn’t it? Maybe I was just drunk and that whole time frame is a distorted memory.
Food for thought for those of you who think this bull market is getting long in the tooth. If you decided not to forget about 2011, we’re really only approaching this run’s 3rd birthday. Considering this, if we go back to the “start” of this “new” bull market on October 3rd, 2011 (closing low during that period), we would say that the base for this latest run began at 1099.23 on the S&P 500. Let’s take a look at some data from S&P on the average annual returns of all Post-WWII bull markets to begin our new comparison:
Now, lets compare those average annual returns to what we have witnessed since our “new” 2011 bull market:
Using the historical averages of modern bull markets, we should expect the S&P to be somewhere around 1800 on October 3rd of this year. That would mean at Friday’s close we were actually overvalued by slightly more than 2%. Given today’s early gains we are actually even more overvalued. This would seem to support election year seasonality in the fact that we would need a sell-off or sideways trading for a decent period of time in order for the market to become overly attractive again.
I would expect volatility to increase from here regardless of geopolitical events. We need a new catalyst to really send this thing higher when considering valuations, earnings growth, and potential for margin compression as wages rise. Long-term I remain very bullish on equities, but I wouldn’t be surprised to see 10-year yields fall back to 2.5% and equities suffer in the short-term.
- Because, valuations.
- Everyone else fucking hates them.
If you have time and patience, I would be buying these emerging nations. So far this year the EEM is already down about 8%. It probably still has a little ways to go, but at these valuations, how can you hate them over the long run?