Helicopter Parents Have Left Investors

January 21, 2016

A Return To Normal

For many professional investors, however, this is more of a return to normal. We understand that markets ebb and flow, that cycles come and go, that investors do sometimes lose money and that the S&P 500 is not supernatural.

Many have highlighted that valuations on U.S. stocks were heightened. Many were concerned that valuations would leave stocks vulnerable if the economy softened and the Fed didn't bail us out. From time to time, the market makes movements that don't seem to be in the numbers. We believe, however, that the recent pullback in U.S. stocks is not outside of the financial models.

Post-Helicopter Parents World

We believe that global diversification is the most optimal strategy at this time. We caution investors from reaching for the recent past. In searching for the comfort of central bank intervention, many investors will gravitate toward concentrated strategies that attempt to make fire in monsoon rains.

We believe that the relative valuations of many diversifier asset classes complement core, long-term domestic exposure well.

For example, the following table shows current P/E ratios for several popular global indexes, then ranks them monthly as a percentile over the last 20 years.


S&P 500 S&P 500 Value S&P 500 Growth S&P
Mid Cap
S&P Small Cap MSCI
EAFE
MSCI Emerging
Current PE 18.2512 15.2256 22.5166 20.2825 23.2017 19.0614 12.1841
Median 17.96 15.49 18.56 20.97 22.80 20.32 13.14
Mean 19.22 15.76 20.84 21.01 23.05 27.35 14.32
Min 11.89 7.08 7.72 11.74 13.25 8.65 4.02
Max 29.92 29.18 51.77 25.80 36.68 161.62 36.43
Percentile 54.6% 40.2% 72.7% 34.9% 53.4% 47.3% 33.3%
25th Percentile 16.52 13.85 15.95 19.74 20.59 15.71 11.62
75th Percentile 21.64 18.11 23.10 22.58 25.09 29.50 15.38

Source: Bloomberg, as-of 12-31-2015

As you can see, emerging markets were less expensive than they had been two-thirds of the time for the last 20 years (as of 12/31/2015). Market performance year-to-date has reduced their sale price further.

Don't Forget About Upside Risk

Few investors profited greatly from the monumental shifts in value of the U.S. dollar, interest rates and oil. While the shifts were significant, they didn't come wrapped in boxes stamped "Guaranteed to happen."

U.S. stocks have largely outperformed the rest of the world due to the rise in the U.S. dollar, low interest rates and cheap oil. What if these extreme valuations shift from tail winds to head winds? What if the economy slows globally, but international stocks outperform the S&P 500 simply because the dollar drops by 7%? What if emerging markets outperform the S&P 500 by 20% because oil more than doubles in value?

We are all taught that "what goes up, must come down." In investing, however, it is important to note that gravity is not a factor, and cycles go both ways.


ValMark Advisers Inc. is the manager of the TOPS Portfolios of ETFs. ValMark started managing "TOPS" separately managed accounts of ETFs in 2002. The firm manages more than $5.1 billion in ETFs for retail and institutional clients in multiple investment products. Email: [email protected]; phone: 800-765-5201. For a complete list of relevant disclosures, please click here.

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