You’re In Good Company!

A friend intimated to me last week that the sound of my blogs of late make it seem like the bottom (of the stock market) is going to fall out any minute, or words to that effect.

I get where he’s coming from, but it’s certainly not my/our intent, nor desire, to paint a bleak picture, to frighten our readers, or, least of all, to pretend that I have some innate predictive power (35 years of living markets is, believe me, a most humbling experience!). Nope, if I’ve learned anything over my professional tenure it’s that markets are, in the short-run, difficult (to put it mildly!) to predict, and that the “secret” to long-run success is to forever position one’s portfolio in line with the present state of and trends in general conditions.

Therefore, my cautious tone — that evolved slowly over the course of the past year — comes entirely from my desire to keep our clients abreast of the present look of the very same data (now formalized in our own index) that had me bullish from the end of the Great 2008 Recession all the way till this July, when I became (and remain) officially “cautious”. And, by the way, the correct characterization is indeed “cautious”, not “cautiously optimistic”, but not yet “bearish” either. 

While I’ll often share charts, stats, etc., that lie beyond the now 87 data points tracked in our index, this simple graph of our index since inception (we’ve also back-tested it at key points over the past 21 years) should pretty much clue you in to why we’re presently “cautious”.

Ya ya ya you say, but the market keeps going up! Yep, you’re right, just like it did after our back-tested index moved below zero in March of 2000, and in August of 2007. It just so happened that both occurrences transpired less than a year before what turned out to be two sizable (to put it mildly) bear markets; taking stocks down 51% and 57% respectively. 

Not saying that history has to repeat, just saying…

If our current macro assessment, by itself, doesn’t convince you that, regardless of what the market does over the next few months, it’s time to be “cautious”, perhaps when you combine it with the following valuation charts, it will:

Forward price-to-earnings ratio (white line = S&P 500, shaded areas = past recessions):

S&P 500 price-to-tangible book value (grey areas = past recessions):

S&P 500 Price-to-sales ratio (red areas = past recessions):

Lastly, clients, if you’re at all concerned about being hedged, and therefore, not having caught all the latest rally had to offer, well, you’re in good company. Warren Buffett currently sits on literally $128 billion in cash! Why? Well, his favorite valuation metric says stocks are, to say the least, expensive right here (note the dates along the X axis):

He certainly didn’t mince words in his most recent shareholder letter:

“Prices are sky-high for businesses possessing decent long-term prospects”


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