"Normal" Valuations As US Election Approaches

The numbers have decreased - slightly - since we published our valuation study in August - when the overvaluation was at 48.83%. Since August, we have seen some fluctuations -and even a day where we were up above 50% overvaluation -but not much change.

Once more we find that the Brexit "panic" was overblown and the US markets have shaken that off quite well. Think about some of the more ridiculous hysteria from certain financial and political pundits at that time. We saw some calls to dump all stocks, "BUY GUNS, BUY SEEDS, BUY GOLD"--as usual - once again. NOT the best tactic for your portfolio and long-term financial health00as we can now see three months later.

The markets called the recent (non) Fed move perfectly. No rate increase for now, but “signals” indicating that the central bank would like to raise rates at least once more in the waning days of 2016. We still think that is a bad idea and that until we have strong signs that the labor market has recovered from the Bush recession and wages are well on the way to recovery it makes no sense to raise rates.

The Fed noted that “the Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives." Of course, those objectives are to maintain a sensible level of inflation (2% currently) and support “full employment” (which was historically set at @5%.) Regardless, 2016 looks highly unlikely to see rates in excess of 0.5 and 0.75%.

Our valuations show that the market is not overheated--and even when the indices flirt with record territory they barely spike above 50% overvalued. From their perspective, there is still room to run here given current price levels and earnings for many of our equities.

Keep in mind though that a Trump victory in November has the potential to wreak havoc on the markets due to the shock and uncertainty. That is the next moment of unknown outcomes that could unsettle investors and shake up global asset flows.

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