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Weekend Reading: Valuation Challenged

Written by Lance Roberts | Aug 19, 2016

Valuation-Challenged

As another week comes to a close, we continue to wrestle with a market that remains detached from underlying economic data and clings to recent levels of over overbought, overextended and low reward/risk outcomes. Of course, in the final stages of a bull market, this is what has historically been the case.

SP500-MarketUpdate-081816

As I stated last week:

“The problem for individual investors is the ‘trap’ that is currently being laid between the appearance of strong market dynamics against the backdrop of weak economic and market fundamentals. Ignoring the last two to chase the former has historically not worked out well.”

There was an excellent article by John Authers for the Financial Times on Friday to this very point:

Markets are extravagantly confident that brokers are too bearish, and that their profit forecasts for US companies are too low. The multiple of 18 times next year’s projected earnings at which the S&P 500 currently trades, according to Bloomberg data, allows little other interpretation. It is at its highest since 2002, outstripping any level it reached during the credit bubble, or when the Federal Reserve was pumping up asset prices with QE bond purchases.

Add to this that US retail sales data suggest a sluggish economy, meaning that there is little reason to expect a big rise in revenues; that margins will be hard to expand; and that core inflation and earnings data suggest at least a whiff of inflation and a risk of higher rates from the Fed. Put all these together, and the highest prospective earnings multiples since the dotcom boom look like irrational exuberance.”

There is currently a strong belief that the financial markets are not in a bubble. The arguments supporting those beliefs are all based on comparisons to past market bubbles.

The inherent problem with much of the mainstream analysis is that it assumes everything remains status quo. However, the question becomes what can go wrong for the market? In a word, “much.”

Economic growth remains very elusive, corporate profits have peaked, and there is an overwhelming complacency with regards to risk. Those ingredients combined with an extraction of liquidity by the Federal Reserve leaves the markets more vulnerable to an exogenous event than currently believed.

It is likely that in a world where there is virtually “no fear” of a market correction, an overwhelming sense of “urgency”to be invested and a continual drone of “bullish chatter;” markets are poised for the unexpected, unanticipated and inevitable reversion.

Take a step back from the media, and Wall Street commentary, for a moment and make an honest assessment of the financial markets today. If our job is to “bet” when the “odds” of winning are in our favor, then exactly how “strong” is the fundamental hand you are currently betting on?

This “time IS different” only from the standpoint that the variables are not exactly the same as they have been previously. Of course, they never are, and the result will be “…the same as it ever was.”

Here is what I will be reading this weekend.


Fed / Economy

 

 Subprime Auto Is Back!


Markets

 


Always Good To Read

 


“If you have the cool nerves of a great gambler, the sixth sense of a clairvoyant, and the courage of a lion, you have a ghost of a chance of making money in the stock market.” ― Bernard Baruch

Questions, comments, suggestions – please email me.

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Lance Roberts

Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” 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, and Linked-In

2016/08/19
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Holistic