The Howard Marks Problem
Historically, we find that when price extensions have exceeded a 12% deviation from the 3-year average return of the index, the majority of the market cycle had been completed. Currently, over the last year, the markets have failed to make much of an advance as prices had exceeded 12% historical deviation.
While this analysis does NOT mean the market is set to crash, it does suggest that a reversion in returns is likely. Unfortunately, the historical reversion in returns has often coincided at some juncture with a rather sharp decline in prices.
It’s been an interesting few weeks for interest rates. As I discussed this past Tuesday:
“With interest rates extremely overbought, the reflexive bounce in rates following the flight to “safety” for the “Brexit” is now functionally complete. This rise in rates is both a blessing and a curse.”
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube