StocksAfter three years of low volatility and record highs, the market has moved to elevated levels of valuation. These valuations methods include Cyclically Adjusted Price Earnings (CAPE), Price to Sales, Price to Book, Dividend Yield, Tobin’s Q ratio (based on replacement value), and others. One of the few positive valuation measures is Relative Earnings Yield, which is earnings divided by price, compared to bond yields.We are also concerned that Wall Street and Main Street investors have become too bullish. Companies are issuing Initial Public Offerings at a blistering pace and the public is borrowing (margin debt) to buy stocks at an alarming rate. Investments in ETFs (Exchange Traded Funds) have also increased dramatically. In some ways, the massive shift to passive investing reminds us of 1987. The market is likely to undergo style rotation as smaller cap stocks are now cheaper than large cap stocks and this has been favorable for them historically. We also see a move away from Wall Street favorites toward Bargain stocks (relative value, solid earnings, rising prices). It may well be a year of greater volatility, but active management could be a key to generating positive returns. | |||||||||||||||||||||
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Market Commentary
