This time, it’s different. But isn’t that always the case? No two points in time are exactly alike.
“We’re seeing widespread frothiness, bubbles, risk-taking and leverage” says “Dr. Doom,” Nouriel Roubini. Roubini, an economist at NYU’s Stern School of Business, is among a very small group of people who can credibly claim to have predicted the 2008 global financial crisis.
Irrational exuberance? Robert Shiller thinks not, “With interest rates low and likely to stay there, equities will continue to look attractive, particularly when compared to bonds.” Shiller won the Nobel Prize in Economics in 2013 and is the Sterling Professor of Economics at Yale.
For every economist there exists equal and opposite economist?
From the S&P 500 P/E ratio to the Buffett Indicator to Tobin’s Q, equity valuations seem stretched – particularly in the US. Yet, we continue to hear convincing arguments that the old standards no longer apply. According to Reuters, data from Bank of America shows that equity mutual funds have attracted inflows of more than half a trillion dollars in the past five months, exceeding inflows recorded over the previous 12 years.
Another argument for dismissing valuation metrics is the earnings cycle and the strong outlook for corporate profits. With income forecasted to jump 24%, the S&P 500 P/E multiple drops from 32 to about 23. While that still exceeds the long-term average, it’s much less concerning. But what are the risks to this assumption? There are many, from the impact of Covid-19 mutations to the Fed’s willingness to let longer-term interest rates continue to rise.
Faced with this level of uncertainty, how can an investor decide which strategy makes sense? Risk-on or risk-off? In a game you’re unlikely to win, the best choice is not to play. Instead, construct a portfolio that will provide a reasonable rate of return and create a high probability of meeting your goals without exceeding your risk tolerance. The first step? Create a financial plan. If you don’t have one, let’s get started. If you do, let’s make sure it’s up to date.
Looking back at Q1, value and small cap stocks outperformed globally. Most notably, small cap value in the US outperformed large cap growth by over 20%. That being said, the value spread remains at or near historic highs – more than double the 25-year average.
This quarter’s review includes an article by Marlena Lee, PhD – Global Head of Investment Solutions at Dimensional that discusses the recent headlines about “meme stocks” and how, at first glance, they may seem to violate the efficient markets hypothesis. We hope that you enjoy it.
As always, please don’t hesitate to discuss this with your advisor, or contact us if you don't have a financial advisor or would like to review your plans.
Please take a moment to view our Q1 2021 Market Review.
J. Brent Everett
Chief Investment Officer
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