Looking at Valuations
In past articles, we have discussed how the markets are no longer “cheap” and that they are anywhere from fairly valued to possibly even “expensive.” When we discuss market valuations, it is important to see where that data is coming from and to understand that there are many indicators that do not all have to agree with one another. Also, it is important to note that while some markets might be above average in valuations (such as the US), that does not mean that is universally true across the board.
When we take a look at the various capital markets, it is informative to consider what the averages have been over the long-term and compare where we are now relative to those averages. The table below highlights several valuation metrics for different parts of the world and compares where we are now to historical averages.
Using a standard deviation analysis, we measure how far away from the average we are. A positive number represents being above average in valuation and as the number gets larger, we typically would argue that the market is getting “expensive.” A negative number, on the other hand, represents a valuation that is lower than average and that the markets might be “cheap” at least relative to history.
From this chart, we can see that the U.S. is mostly running above historical averages in almost every valuation metric. While this doesn’t mean we have to have a correction, we can always grow into the valuations, it does mean that buying into this market doesn’t represent a traditional value opportunity.
Valuation analysis is useful if used appropriately but it is important to recognize that it is not a short-term prediction tool. The markets can stay expensive or cheap for long periods of time and it can be years before we see any kind of mean reversion. While this is an important tool that we use, we will still argue that finding the right asset allocation will always remain the most important decision you make when considering your investment strategy.