Global Stock Market Valuations
As a result of the healthy gains we have seen off the early March lows, stocks have moved from very cheap levels four months ago to valuations that seem appropriate (from a longer-term perspective) given the challenging economic environment.
The economy is clearly beginning to recover, but the strength and durability of the rebound remains to be seen. After this initial bounce from government stimulus and pent-up demand runs its course, the economy may be vulnerable to (1) a “rolling recession” type of environment as a result of private sector balance sheet rehabilitation, which will involve a multiyear process of higher savings and debt reduction, and (2) inflation pressures resulting from unprecedented federal budget deficits and monetary easing from the Federal Reserve.
Ordinarily, in the early phase of a new bull market, investors should be tactically overweight risk assets such as stocks, relative to their neutral longer-term asset allocation targets. In light of the risks cited above, as well as residual systemic risks emanating from the banking and real estate sectors, we believe investors are well-advised to take a somewhat more cautious posture and maintain stock allocations that are more in line with their neutral longer-term targets.
Broad Stock Market Index Valuation Analysis
Price/Book Value (Net Assets) Multiples 1/1/94 – 6/30/09
Blue horizontal lines represent average price-to-book multiples over the period.
Red horizontal lines represent 25th and 75th percentile price-to-book multiples over the period.