Friday, August 25, 2017

BlackRock: "Don’t let the valuation bears scare you"

The writer, Kate Moore, is a Managing Director and Chief Equity Strategist for BlackRock.
From the BlackRock blog:

Equity valuations may look rich compared with history, but we do not believe this is something to be feared. Kate explains.
Many investors are skeptical about equity valuations after an eight-year rally. Investor trepidation is understandable. The cyclically adjusted price-to-earnings (P/E) ratio for U.S. stocks was at its highest level since March 2002 as of end-July according to Thomson Reuters data, a level last associated with a major market correction.

Equity valuations may look rich compared with history, but we do not believe this is something to be feared, as we write in our new Global equity outlook Goldilocks and the valuation bears. We see starting valuations as an indicator of future returns only in the long run. Drivers such as earnings growth and momentum power markets in the near to medium term, in our view.

We analyzed almost three decades of equity market history in the U.S., Europe and Japan, and roughly two decades in emerging markets. We composed a blend of five key valuation metrics—including forward price-to-earnings ratios and price-to-book value—and examined how strong the relationship was between starting valuations—or valuations at the time of purchase—and the variability of subsequent U.S. dollar returns over time.

We found that starting valuations have historically been a poor indicator of future equity returns in the short run. Sentiment-driven changes in market multiples tend to trump fundamentals for holding periods of five years or less. Cheap stocks can remain cheap for years, and often need a catalyst for re-rating. Similarly, highly priced stocks can ride waves of momentum to become even more expensive, before eventually settling to more reasonable multiples.

Starting valuations are a more reliable compass in the long term, we found. They have shown a strong relationship with U.S. equity performance over 10-year periods, our analysis shows. See the chart below....


Discerning reader has probably noticed we haven't made many market/individual equity calls this year.
What's to say? Stocks are going up, things are increasing in price.
And the trying-to-call-market-turns game is a lot like Twitter.
Just another opportunity to make yourself look like a damn fool.*
So we outsource.
To folks who seem to have an idea about what's going on.

*From The Quotations Page:
...It's been attributed to many persons, but seems to have its roots in the Bible:

"It is better to remain silent and be thought a fool, than to open your mouth and remove all doubt ". -- George Eliot
"Better to remain silent and be thought a fool than to speak out and remove all doubt."-- Abraham Lincoln (also attr. Confucius) 
"It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt."-- Mark Twain (1835-1910) 
"Even a fool, when he holdeth his peace, is counted wise: and he that shutteth his lips is esteemed a man of understanding." -- Bible, 'Proverbs' 17:28.
There are no citations for Lincoln or Twain. I have my doubts about Confucius.