U.S. equity valuations are high.
How high?
In January, the CAPE (Cyclically Adjusted P/E) ratio rose to 33.76. This is more than double the average historical CAPE Ratio since 1900. It is also higher than every period in history with the exception of the late 1990s on the way up (February 1998 onward) and early 2000s on the way down (until May 2001).
Historically, we have seen Bear Markets after extremely high valuations (1929, 1998, and 2000) and extremely low valuations (1932, 1948, 1976, and 1980).
So we can use valuations to time the market? From a timing perspective, not necessary. In the short run, investor sentiment (Benjamin Graham’s “voting machine”) is all that matters. As such, an expensive market can always get more expensive while a cheap market can always get cheaper.
But in the long run, extreme valuations can skew the probabilities, either in your favor (cheap market) or against you (expensive market). From current valuation levels, the odds above-average U.S. equity returns over the next 5-10 years are not high. But how we get to those returns is anyone’s guess.
How high?
In January, the CAPE (Cyclically Adjusted P/E) ratio rose to 33.76. This is more than double the average historical CAPE Ratio since 1900. It is also higher than every period in history with the exception of the late 1990s on the way up (February 1998 onward) and early 2000s on the way down (until May 2001).
Historically, we have seen Bear Markets after extremely high valuations (1929, 1998, and 2000) and extremely low valuations (1932, 1948, 1976, and 1980).
So we can use valuations to time the market? From a timing perspective, not necessary. In the short run, investor sentiment (Benjamin Graham’s “voting machine”) is all that matters. As such, an expensive market can always get more expensive while a cheap market can always get cheaper.
But in the long run, extreme valuations can skew the probabilities, either in your favor (cheap market) or against you (expensive market). From current valuation levels, the odds above-average U.S. equity returns over the next 5-10 years are not high. But how we get to those returns is anyone’s guess.
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