Equity Valuations No Longer Matter?

One benefit to writing blog content is it serves as a record of ones past thinking and the results of any decisions made from the prior analysis. With that in mind I reviewed some of the topics written over a year ago, that is, in June/July of 2016. A few of the topics at that time had to do with valuations, PEG ratios and the fact the market was trading at an all time record high. In fact one article was titled, Is It Right To Be Bullish Near A Record Market High? The conclusion at that time was to stay invested in equities as I wrote then,

"Being bullish after a double digit market decline seems a lot easier than being bullish near market tops. Knowing the market does not move up or down in a straight line, are there factors we see that would support higher equity prices? In the intermediate and long run, we believe fundamental company and economic factors are key drivers of stock price returns."

That last sentence above was an important factor in our firm's bullish posture last year.

Fast forward to today and just about all of the same concerns being expressed last year are being expressed again this year and valuations are higher now versus a year ago. At the same time, the S&P 500 Index is up over 16% in the last 12-months. Value investors are struggling with these high valuations. An interesting article/interview appeared in Barron's this weekend where Barron's spoke with a member of Grantham Mayo van Otterloo (GMO), founded by the well respected investor Jeremy Grantham. One response from the interview relating to valuation,

"The U.S. market is at its second or third most expensive point in history. So people are saying, “I either don’t understand the world anymore, or I don’t think that valuation matters anymore,” which is a really weird thing to say. You’re giving up the one piece of information that you know helps determine your long-term returns. You cannot describe yourself as an investor if you are going passive. You are welcome to call yourself a speculator, but you honestly can’t say you care about expected returns if you are going passive at this time."

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