Email of the day on stretched valuation metrics:
Comment of the Day

March 14 2017

Commentary by Eoin Treacy

Email of the day on stretched valuation metrics:

Yes, I know that prices can remain stretched a lot longer than you can imagine and we need to watch price action but.....
 

Eoin Treacy's view

Thank you for these illuminating charts. This article focusing on some of the points raised by Robert Shiller may be also be of interest. Both these articles highlight what might be considered the inflationary effects extraordinary monetary policy have had on asset prices.

That’s why there is so much disagreement about what it all means. Taken at face value these measures represent warnings that we are in the latter stages of a medium-term bull market which began in early 2009. That makes sense since a largely uninterrupted expansion that lasts eight years is lengthy by any standard and even secular bull markets are punctuated by occasional medium-term corrections.  

We should also remember that all of this is taking place within the wider context of a 36-year bull market in bonds which is looking even more long-in-the-tooth and an equity secular bull market which only started in 2012 with the S&P500’s breakout. Therefore can we reasonably conclude we are close to the end of the beginning? 

I think it is worth considering that the valuation lows at the beginning of the secular bull market that began in the 1980s occurred after the breakout. That would suggest that the next recession, whenever it occurs could represent a particularly attractive entry opportunity. 

In the meantime the S&P500 is somewhat overextended relative to the trend mean and is due another pause if the rhythm of the post-election advance is to remain intact. While there is always something to worry about we need to ask a simple question. Is there any evidence of Type-1, 2 or 3 trend ending characteristics and right now the answer is no. However we do know what they will look like when they appear. 

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