Skip to content

Valuations

Mar 15 2023

Masquerade Party

  • Mar 15, 2023

Style investors recently witnessed a rare event when, on February 13th, the P/E ratio of the S&P 500 Growth Index fell below that of the S&P 500 Value Index. At first glance, it is tempting to attribute this valuation flip-flop to the 2022 bear market, which saw Value outperform Growth by a whopping 24.2%. However, the bear-induced collapse of Growth stock prices in 2022 only served to return the P/E spread to a level just below its historical median of 5.1, meaning that the final move toward parity was caused by a force outside the market itself. That “something else” was the S&P 500 style reconstitution that occurs annually on the third Friday of December.

Mar 07 2023

In The “Eye” Of The Beholder

  • Mar 7, 2023

Stocks could trade higher in the next few months as CPI numbers enjoy easy year-to-year comparisons, prompting a more soothing tone in daily Fed-speak. Then again, the lagged impact of the last year’s rate hikes and balance-sheet shrinkage has yet to materialize, meaning we’re likely in the eye of the storm.

Feb 23 2023

The 2021 Speculative Mania And Its Aftermath

  • Feb 23, 2023

One of the societal benefits of recessions and bear markets is that they serve to correct the unhealthy excesses that build up in overheated economic booms and overly enthusiastic bull markets. As market historians, we believe it is instructive to look back at cycles of excesses and their corrections to learn how such patterns evolve and, quite often, repeat themselves.

 

Feb 07 2023

Valuations: What Bear Market?

  • Feb 7, 2023

If the October S&P 500 low holds, the normalized P/E ratio of 22.7x on that date will signify the priciest bear market bottom in history; in fact, it is exactly the same level reached as at the August-1987 bull market high. Since October, the normalized P/E multiple has grown to 25.5x—higher than all but three previous bull market peaks.

Feb 07 2023

1966-67: When The Yield Curve “Failed”

  • Feb 7, 2023

Given the tendency of economists and strategists to dismiss the message of an inverted yield curve, it’s surprising there’s been no scrutiny of the “dog that didn’t bark”—the inversion of 1966. That’s the last time an inverted curve did not lead to a recession.

Jan 24 2023

Is Value Still A Value?

  • Jan 24, 2023

Deflating valuations in the Technology and Innovation space produced ghastly results for growth investors in 2022, with the S&P 500 Growth index experiencing an agonizing 29.4% loss. Meanwhile, last year’s bear market was no more than a mild irritation for value investors as the S&P 500 Value index lost just 5.2%. The collapse in exuberantly priced growth stocks produced a 24.2% return spread between the value and growth styles, which goes into the record books as the second biggest annual win for value since 1975.

Jan 07 2023

A One-Hundred-Year Market Echo

  • Jan 7, 2023

Hopes that this decade might see a repeat of the “Roaring Twenties” took a hit last year. But there’s plenty of time to recover, and bulls will be encouraged to learn that cumulative stock market performance for this decade, thus far, is better than at the same point in the Roaring 1920s.  

Nov 21 2022

Tactical Tools For A Stronger Dollar

  • Nov 21, 2022

The 2022 bear market has been driven by collapsing valuation multiples, particularly for expensive growth stocks and unprofitable companies. Coming into the year, U.S. stocks stood as one of the most egregiously valued equity markets around the world, motivating investors to look elsewhere for more reasonably priced alternatives. Fortunately, international stock markets offered much better valuations that could serve as havens from the coming U.S. valuation collapse. Unfortunately, the strategy of seeking refuge in moderately priced foreign markets was foiled by an unusually strong U.S. dollar, leading us to take a closer look at how moves in the USD affect investment outcomes for domestic investors.

Nov 05 2022

Valuation Mirage?

  • Nov 5, 2022

Thanks to the 2009-2021 experience, an entire generation of investors can’t distinguish between a stock market that’s down in price and one that’s actually “cheap.” The current bear market seems on course to make that distinction relevant again.

Nov 05 2022

Thoughts On The Secular Outlook

  • Nov 5, 2022

Some have speculated that 2022 might have been the kick-off for a decade-long era in which the broad stock market indexes will make essentially no progress, like 1966-1982. However, that earlier experience provided opportunities within other market segments, which will also stand a much better chance in coming years. 

Oct 24 2022

The 60/40’s Annus Horribilis

  • Oct 24, 2022

The balanced portfolio strategy of allocating 60% to equities and 40% to fixed income generated a highly satisfactory 7.9% annualized return over the last 30 years. Despite the excellent returns earned by investors following this strategic model, the past couple of years have seen a parade of articles with headlines such as “Is the 60/40 Portfolio Obsolete?” and “Is the 60/40 Dead?” Given the central importance of this moderate allocation strategy to investment industry practices, we felt a closer look at the 60/40 portfolio was in order.

 

Oct 07 2022

Tightening Into A Slowdown: Month Eight

  • Oct 7, 2022

We think the U.S. economy will slip into recession sometime in the next year, but the level of “excess savings” provided by pandemic aid renders the already difficult task of timing more elusive than ever.

Sep 30 2022

Time To Retire The Fed Model?

  • Sep 30, 2022

We’ve heard no references lately to the famous “Fed Model” for stock market valuation. We think we know why: The model’s usual proponents probably don’t like its current verdict—which is that stocks are far more expensive than at the early January market peak.

Sep 08 2022

Another Stab At The “Downside”

  • Sep 8, 2022

How far might the S&P 500 fall in a recessionary bear market? The 2002 and 2020 stock market lows were both produced by “recessionary” bears; based on history back to the 1920s, those two lows stand out as the priciest bear market bottoms on record—and it’s not even close.

Sep 08 2022

No Rest For The Weary

  • Sep 8, 2022

If there’s a polar opposite to “Goldilocks,” this must be it. Not too hot and not too cold? What about both? Job growth and inflation are hot enough to force the Fed to follow through on its hawkish promises. But the leading indicators continue to warn us of oncoming cold. The odds that the porridge settles at the right temperature, without an intervening recession, look longer by the day.

Aug 05 2022

Valuations: Living Beyond One’s Means?

  • Aug 5, 2022

We won’t dispute that investors were not genuinely frightened at the June market lows, or that fears have evaporated following a 13% rally in the S&P 500. The distress is understandable: For 26 traumatizing days in 2022, our S&P 500 Normalized P/E multiple traded below its 1957-to-date top decile!

Aug 05 2022

Bear Market Rallies In Context

  • Aug 5, 2022

The 2022 bear market is the 13th cyclical bear since 1950, and it’s already joined the mightiest half of its predecessors based on the fact that it’s actually contained a bear-market rally. Six of the prior 12 bear markets weren’t interrupted by even one rally of at least 10%.

Jul 08 2022

“Recessionary” Valuations?

  • Jul 8, 2022

The bear was a mere cub back in March when we examined the historical record of buying S&P 500 dips in the -10% to -12% range. “Blindly” buying them turned out to have mediocre returns, but we illustrated that the positions of various business-cycle indicators could help one determine whether or not catching the proverbial “falling knife” was warranted.

Jul 08 2022

Break Out The Checkbook!

  • Jul 8, 2022

We apologize for that terribly misleading teaser of a title, but the bills for the stock-market mania of 2020-2021 are piling up. Inflation is one of them, lately increasing each month as relentlessly as cable TV used to. And for the 10% of households who own 90% of the stocks, market air-pockets such as June’s are like “surprise” medical bills: There’s rarely just one

Jun 22 2022

“PSsss”

  • Jun 22, 2022

The most brutal bear markets occur when falling earnings are accompanied by shrinking valuations, producing a compound negative effect on stock prices. Investors in 2022 have (so far) avoided this double-whammy in that valuations have taken a hit, but EPS estimates are holding strong. We are intrigued by the notion that 2022’s bear market has, to date, been all about valuation compression rather than earnings weakness. Investors are coping with the problems of the day by letting the air out of bubbly valuations, and this report takes a closer look at the valuation squeeze underlying the current selloff.

Jun 07 2022

The Bear Market In P/E Multiples Rages On

  • Jun 7, 2022

Throughout most of the COVID rebound, market bulls told investors (correctly) to ignore valuations and simply ride the liquidity tide. But with that tide now flowing out (and at possibly its fastest speed ever), guess what the one-time liquidity junkies see as a reason to stay in stocks? Yes, cheaper valuations!

Jun 06 2022

Research Preview: P/E Multiple Compression In 2022

  • Jun 6, 2022

Stock market corrections are the result of falling valuations and/or falling earnings, and when both conditions appear together, investors are in for a rough ride. Thus far, the 2022 selloff has been confined to compressing P/E ratios, and we launched a research project to take a closer look at shrinking stock valuations in this market downdraft.

May 13 2022

Some Perspective For Dip Buyers

  • May 13, 2022

Losses in the Russell 2000 Growth Index and the NYFANG+ Index have topped 40%, and the only true equity rockstar, spawned by a 13-year secular bull market, has watched her fund’s value drop by more than three-quarters. Yet there’s still a televised debate as to whether this decline is even a bear! Could there be a more devious creature on the face of the planet?

 

Apr 22 2022

The “Donut” Might Be Healthier Than You Think

  • Apr 22, 2022

Lent ended last week, allowing Christians to resume the intake of unhealthy foods. But rather than a nice, thick T-Bone steak, we’d suggest sampling one of the few items that’s fattened investors’ accounts in 2022—the Donut!

 

Apr 06 2022

A Tale Of Two CDs

  • Apr 6, 2022

Investors considering a position in the Consumer Discretionary sector need to be aware of what they are buying: a basket in which one-half consists of mature, modestly-valued consumer brands, while the other half is two mega caps with excellent growth profiles and high absolute valuations. It would be a mistake to view this sector as a homogeneous set of companies.

Mar 24 2022

The Bull Visits The Vet

  • Mar 24, 2022

Just after yesterday’s close, we loaded our precocious bull into an SUV and drove to the local veterinary clinic for a two-year checkup.

Our bovine buddy drew some sympathetic stares while we were waiting in the lobby. Noting our bull’s droopy eyelids and gray facial hair, an assistant informed us, “You know, you didn’t actually need to bring him here. We now have a mobile euthanasia service.” We just smiled, and waited for the veterinarian, who is said to be a specialist in this new super-species of bull.

Mar 05 2022

Reversion, But To Where?

  • Mar 5, 2022

The concept of “mean reversion” used to help build massive fortunes. Of late, a better mantra has been “maximum attraction,” as valuations and bullish psychology have matched or surpassed excesses of the Y2K Tech bubble. Meanwhile, corporate profit margins, once dubbed “the most mean-reverting series in finance” by Jeremy Grantham, have now topped those seen near the Y2K top by more than 50%.

Feb 05 2022

Bubble Or Not? Two Valuation Takes

  • Feb 5, 2022

In early 2018, we thought the market was expensive, but certainly not a bubble. Today, the trouble is not just high P/E multiples, but the sustainability of the “E” itself—with profit margins nearly 20% higher than ever before. Whether one believes U.S. Large Caps are engulfed in a bubble or not, we have a P/E ratio for you.

Jan 19 2022

Speculating In “The Nebs”

  • Jan 19, 2022

One measure of a bubbly bull market is the degree of speculative fervor embedded in the prices of companies with nebulous, indeterminate, or even nonexistent intrinsic values. Since the bear market low in March 2020, speculative manias have evolved in a menagerie of asset classes including Innovators & Disruptors, SPACs, meme stocks, crypto currencies, and NFTs. Based on the breadth of valuation extremes across numerous and diverse assets, this bull market may rank second to none.

Dec 16 2021

Discretionary Durables: A Bubble In Fun

  • Dec 16, 2021

Extremely loose monetary and fiscal policies during the pandemic have created distortions and disequilibria throughout the economy. The most visible bubbles may be in financial markets, evidenced by the boundless valuations applied to visionary startups and the speculative fascination for digital assets of all types. This report examines a bubble of a different kind; not a financial bubble but rather a real-world bubble in “fun”. Producers of recreational goods are flourishing during the pandemic, posting massive sales gains and a tripling of net income, yet selling for miniscule valuations.

Dec 06 2021

Research Preview: Discretionary Durables

  • Dec 6, 2021

While retail spending has boosted staples and durables alike, we believe that discretionary durables have been the prime beneficiary of changing lifestyles and spending patterns, with skyrocketing sales and inventory outages that may not reach equilibrium even in 2022. 

Oct 15 2021

Long-Term Returns: You Wanted The Best, You Got The Best!

  • Oct 15, 2021

In a possible sign we’re not getting enough oxygen at current valuation altitudes, we decided to replace the usual mean-reversion technique with a much friendlier approach that we’ve dubbed “maximum attraction.”

Oct 07 2021

Valuations And The Earnings Recovery

  • Oct 7, 2021

Analysts at Standard & Poor’s will soon confirm what’s been known for several months: The earnings downturn associated with the COVID recession was the shallowest and shortest of any recession-related EPS decline.

Sep 08 2021

Not Overthinking Small Caps

  • Sep 8, 2021

There are some positive cyclical influences for Small Caps, like higher inflation and deeply negative real interest rates. But in our minds, the valuation spread versus Large Caps is more important. 

Sep 08 2021

What’s Your “Number?”

  • Sep 8, 2021

Those in their peak earning years (40s and 50s) who’ve also enjoyed the stock market’s windfall gains are very likely to have seen their annual expenses climb much higher than the Consumer Price Index over the last several years.

Sep 08 2021

Let Us Add To The Bullish Cacophony

  • Sep 8, 2021

It’s been a heck of a stock market year, and there are still four months left. What else could go right? Monetary conditions, for one thing—at least as proxied by our Dow Bond Oscillator (DBO).

Aug 06 2021

Big Time

  • Aug 6, 2021

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.

Jul 08 2021

2020 Post-Mortem

  • Jul 8, 2021

This summer marks the first anniversary, not of the COVID-19 stock-market low, itself, but of the much belated “confirmation” of that low.

Jun 05 2021

The Global EPS Rebound

  • Jun 5, 2021

For years, we’ve noted the increasing valuation gap between domestic and foreign stocks. And for years, we contended that the most likely catalyst for a narrowing of that gap would be a recession-induced cyclical bear market in stocks. Evidently the 2020 bear market was not big enough to do the job.

May 07 2021

New Era Valuations?

  • May 7, 2021

We understand the various rationale for the upward shift in equity valuations seen over the last quarter century or so. Unfortunately, wiping away all market history prior to 1995 does not make stock valuations appear significantly less inflated.