P/E Ratios
Who Doesn’t Love A Sale?
The S&P 500 closed May 5th with a moderate 13.5% loss from its all-time high, a move that explains only part of what’s already been an historic bear market—in P/E ratios, that is.
New-Era Profits, New-Era P/E Multiples
The current mania won’t last forever. But our use of the “New Era” label in describing the last-quarter century or so of stock-market dynamics is still useful—in part because it highlights fundamental developments that simply cannot be repeated indefinitely.
A Good Year For Cheapskates
For our more fundamentally-oriented readers who are repulsed by all this talk of momentum, we have an alternative. Just forget about performance and focus solely on value!
Our Annual Lament On Foreign Equities
There should be a name for the syndrome suffered by foreign stock investors over the last decade or so. “Groundhog Day” doesn’t quite cut it, because that event repeats only once a year. It seems like this time of year we always feature a chart showing a healthy YTD double-digit gain in the S&P 500, along with a bond-like gain in EAFE, and a bond-like gain or loss in the MSCI Emerging Markets Index.
Big Time
Market environments are driven not just by industry preferences, but also by a bias toward the very largest companies. We have developed a new set of groups composed of the 10 largest companies from each sector. With several of these baskets sporting positive rankings, we felt a closer look was in order.
The “Rule Of Twenty” Revisited
Pundits could reasonably argue the market has never been more expensive in light of the prevailing rate of inflation. That’s the conclusion of the “Rule of Twenty,” which proposes that the stock market’s P/E ratio and the trailing 12-month Consumer Price Inflation rate should sum up to 20.
What If The Valuation Message Turns Out To Be Really Wrong?
Today’s Peak P/E ratio implies the S&P 500’s ten-year-forward annualized total return will be in the range of -3%. If this P/E ratio turns out to be as deceptively pessimistic as it was at its worst point in history, the S&P 500 could produce an annualized nominal total return of about +5% over the next decade.
A Closer Look At The “Rule Of Twenty”
Inflation and its potential impact on the stock market is the topic du jour, resurrecting ideas that were in vogue 30- to 40-years ago.
Steve Leuthold’s 1980 book, The Myths of Inflation and Investing, provided an exhaustive review of the evidence. But for lighter reading, more appropriate for a summer Friday, we revisit the “Rule of Twenty” developed by strategist Jim Moltz in the early 1980s.
Music For The “Mania”
At some point during the June/July streak of seven-consecutive S&P 500 daily-closing highs, an album from 1980 popped into our heads: Nothin’ Matters And What If It Did—released when John Mellencamp was still known as John Cougar. It brought to mind some “nothin’s” that seem not to matter.
Looking Forward To 2021 Earnings
As we turn the page on 2020, a peek ahead to the S&P 500’s 2021 operating earnings is probably in order. You never know, earnings and valuations might be important again one day.
It’s Demographics, Stupid! (Not The Economy.)
Turn on financial television at any random time, and you’re likely to soon hear the argument that still-high U.S. stock market valuations are “justified” by extremely-low interest rates. We’ve countered that these low U.S. rates are simply a reflection of the secular slowdown in economic and earnings growth.
For Value Investors Only!
With the possible diminution of “alpha” in price momentum strategies, we recommend that sector allocators consider approaches that are more countertrend or contrarian in nature.
No Place Like Home For The 2010s
We thought we’d get a jump on all the “End of the 2010s” retrospectives you’re sure to see next month. Though not quite yet the official end of the decade, the changing of the “tens” digit definitely has a certain gravitas to it.
Low Rates Don’t Justify Higher P/E Ratios (And U.S. Investors Should Be Glad)
The fear (or hope) that U.S. bond yields would fall to zero or below subsided over the last month. However, the belief that low yields merit significantly above-average P/E ratios remains stronger than ever.
Low Vol For All Seasons?
The early August setback took the S&P 500 below its late-January 2018 high—and the time when we first trimmed net equity exposure in Leuthold tactical funds from a nearly fully-invested posture.
The Small Cap Discount Deepens
Small Caps typically underperform during a bull market’s final phase, and our findings with respect to the Output Gap aid our understanding of that phenomenon.
Be Wary Of The “E” In P/E
U.S. equity valuations remain considerably higher than those of any major foreign market, but there’s no denying they’ve improved from the cyclical peak made in January 2018. That’s true across the capitalization spectrum, and on the basis of both normalized and non-normalized fundamentals.
Think Halloween Is Behind Us? Beware, Zombie Alert!
“Zombie” companies are being kept alive by low interest rates and generous credit conditions, and the number of them, worldwide, has risen significantly over the past few years.
P/E Crash!!
While this year’s liquidity squeeze has yet to exact the toll we ultimately expect on the U.S. stock mar-ket, it has certainly contributed to a sharp compression in P/E multiples.
Revisiting The Y2K Highs
Bobby Knight thought coaching would be perfect “if it weren’t for those damned games.”
Dialing In On Downside Risks
Question: Your “Estimating The Downside” section shows the S&P 500 would lose 26% if it reverts to its 1957-to-date median valuation level. The downside estimate for the S&P Industrials Index, however, is almost -40%. Why such a huge difference?
Today Versus The Tech Bubble Peak
We’ve generally spoken of the market’s “broad participation” as a good thing. And from a purely technical point of view, it is.
How To (Almost) Double Your Money In Under Ten Years
Buying the S&P 500 on one of the worst possible days in history ultimately yielded a total return of +87.4% (+6.8% annualized) through the end of April 2017...darn, sounds like an advert for Vanguard!
A Semi-Annual Checkup!
Call off the mortician, and bring on the pediatrician for the bull market’s 7 1/2-year checkup this month.
Same Ponds, Different Fish?
The impact of atypically-high current valuations has become a challenge for style-box investing. High quality, mature dividend payers have habitually resided in the Value and Blend boxes, but investors have bid up those valuations as they look for alternatives to low bond yields.
No Sector On Sale...
While cap-weighted U.S. indexes remain far below their 2000 valuation highs, in some ways today’s market presents an even more difficult hurdle for value managers.
Low Vol Divergence, Episode 3
The divergence between S&P 500 Low Volatility and High Beta Indexes has emerged for the 3rd time in a year. The 3-month performance spread is even more extreme than it had been on the eve of either the August or December stock market air pockets.
Small Cap Premium Finally Shrinks—But Remains Historically Extreme
July’s Russell 2000 -6% rout finally deflated some of the Small Cap valuation premium we’ve been grousing about in recent years.
Small Cap Valuation Check
Small Caps have staged a nice rebound in the last several weeks. On July 3rd, the Russell 2000 rose to within a fraction of an index point of its March 4th all-time high. But on a relative strength basis, the bounce has been pretty muted.