This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by Corey Hoffstein, co-founder and chief investment strategist of Boston-based Newfound Research.
By its third anniversary, it had already been dubbed “the most hated bull market ever.” For those keeping score at home, that was over five years and 100 percentage points ago in the S&P 500.
Being consistently wrong has not stopped market soothsayers from reading the tea leaves and predicting doom and gloom all the way up. While we are sure that a prediction of “the market will go down” will eventually prove true—especially when repeated ad nauseam—to quote Howard Marks, “When you’re early by six or more years, it’s not clear you can ever be described as having been right.”
To hedge our chiding, we’ll note that it is possible that doom and gloom was the higher probability event all along, and that perhaps, somehow, the market has merely managed to deftly leap from one impossible feat to the next.
Fool’s Errand
Or, perhaps, prediction in such a complex and chaotic environment has been, and always will be, a fool’s errand.
Yet as the market continues to make all-time highs, the predictions come rolling in. In many ways, we always seem to be fighting the last recession. With the traumatic dot-com bubble and the housing-driven financial crisis still well within our collective memory, equity valuations and housing prices remain sore subjects.
This makes them perfect data points for stirring up our emotions—those that make us more susceptible to buying whatever convenient panacea is being offered to protect us.
Yet if we take a step back, we may find that many of the facts being frequently touted today lead to conclusions that are not as black and white as they are made out to be.
US Equity Valuations
The dot-com bubble reminded us that while unbridled optimism can lead to astounding technological innovations, it rarely makes for a sound investment thesis. As it turns out, valuations do matter.
Today the Shiller CAPE—a smoothed measure of the market’s price-to-earnings ratio—has edged toward 30: a level only surpassed in the Roaring ’20s and the dot-com bubble. And we all know how that turned out.
Data source: Shiller Data Library. Calculations by Newfound Research. Shiller CAPE is the Shiller cyclically adjusted price-to-earnings ratio, which uses smoothed earnings over the last ten years. Data from 1900 to June 2017.
