EC The Silencing Of The Bears

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Valuation levels hardly look better when combining indicators with some of the strongest correlations with future returns. From regression to Crestmont to the Q Ratio to CAPE PE/10, the average valuation level has only dropped slightly from the three-standard-deviation overvaluation level reached late last year.

Is 96% overvaluation genuinely reassuring now? When it remains higher than in 1929 and 2007? When investing icon Jack Bogle of Vanguard fame opined, “Reversion to the mean is the iron rule of the financial markets.” (Note: If stock valuations were cut in half, prices would likely need to fall 33%-40% during a period of earnings contraction).

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I may be wrong about selecting less risky assets for the current market environment. Back in December, for example, I talked about using high-quality preferreds like Stanley Black & Decker, Inc. 5.75% Junior Subordinated Debenture due 2052 (SWJ) and high-quality convertibles like Cheniere Energy 2045 (Coupon 4.25% Cusip 16411RAG4). From my vantage point, the risk-reward relationship for these securities is better than for the overall U.S. equity market.

That does not mean I have abandoned common stock risk entirely. A large number of our near-retiree and retiree client base have 35%-50% equity as opposed to our top target of 55%-70%. We simply have more confidence in high-quality preferreds and high-quality convertibles in rounding out the risk asset exposure.

Perhaps this makes me a bear. Perhaps not. Either way, I’m going to have an old friend for dinner and a nice Chianti.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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