CAMS Weekly View from the Corner – Week ending 9/21/2018
September 24, 2018
Stock Market Overvalued?
There doesn’t seem to be an edition of these Weekly Views, here in 2018, that we do not at least mention that our markets our historically highly valued. We typically present this fact against the backdrop of an ensuing necessity of strong consistent economic growth to support said valuation levels.
Being the stock market is a collection of businesses and like any business a favorable economic backdrop provides an environment whereby sales and profits are more easily increased. Profits are the lifeblood of a company’s value and with this, a healthy economy aids in providing wind in the stock market’s sails if you will.
At times collective market participants get too lathered up about the economic backdrop and the on-going business success of companies comprising the stock market as a whole. This leads to prices being bid up to levels that are setups for notable downside adjustments when the economy falters.
Through the lens of history the economy faltering is a when, not if, experience we can count on.
The chart above displays the entire value of the stock market as a percentage of the overall economy. With this, the higher the percentage the higher the valuation of the stock market relative to the economy. More simply, the higher the percentage the more expensive the stock market is at any given time.
Currently, through this measure, our current stock market is very expensive.
The above view dates back to 1924 which gives us plenty of historical context. At our current reading we see the stock market, through this valuation measure, is at the highest level ever recorded since the inception of this chart. That’s nearly 100 years of history!
The downside of this valuation study is always the same when it comes to valuation studies. That is, they are next to worthless in their ability to time the market. More simply, they offer us little in terms of when we should cut exposure to stocks. Nonetheless, it is essential to be knowledgeable of the valuation backdrop so we are not lulled to sleep by an ever rising market.
All told, we clearly have a highly valued stock market relative to the level of our economic activity on a historical basis. If our economy heads notably weaker the stock market will be looking at significant downside, hence our mantra of an absolute need for strong and consistent economic growth.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
Footnote:
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.
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