Is The “Market” Overvalued?

“Davidson” submits:

Morningstar data comparing the top 10 issues of VOOV (SP500 Value issues) vs VOOG (SP500 Growth issues) as of Feb 28, 2021 help to explain the widely differing market forecasts. While it may sound like there are two types of investors, Value vs Momentum, the fact is when one examines the many perspectives more closely one finds a wide spectrum of opinion. In my experience, no two investor perspectives are identical. Each carries a unique mix of Value and Momentum providing specific advice as if their own view is the only correct course of action. It is a Tower of Babel which investors must work to decide their own course of action.

Many inexperienced investors simply throw up their hands and invest in what is most popular and touted by the media. It rapidly devolves into everyone chasing popular price momentum issues which become over-crowded carrying much higher valuations than the rest of the market. After all, the name of the game is to buy lower/sell higher before other investors panic. Right?

Momentum price trends can continue for some time especially when supporting themes dominate investor thinking. Driving valuations to extreme levels is justified by many who believe that market pricing works on ‘hidden information’ and in some fashion, the marketplace thought of as an efficient pricing mechanism of value not recognized by most. On this topic, Eugene Fama wrote “Efficient Capital Markets: A Review of Theory and Empirical Work”, 1970, and was awarded the 2013 Nobel Price for bringing “…science to finance”. If the world were only that simple.

If one does the individual analysis, requiring individual assessment of all SP500 issues, one finds that at no point in time has mathematical analysis ever revealed sensible pricing to financial metrics. There will always be periods during which the growth theme dominates investor interest and other times value issues will dominate. The valuations of accepted growth issues will always exceed the sensibilities of those sensitive to valuation. Predicting when investors switch between these themes is impossible. The best one can do is to monitor valuations and media context. The final analysis lays with what the media touts loudest. This is the primary information source for most inexperienced investors. The media begins to tout a social/market trend well after the trend has begun. The media if it wants to maintain its advertising revenue needs to present daily commentary where investors are, not where investor interest is going, otherwise they lose viewership.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests ...

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