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Yes Valuations Are Historic

CAMS Weekly View from the Corner – Week ending 4/13/2018

April 16, 2018

There doesn’t seem to be an edition of these Weekly Views here in 2018 that we do not at least mention that our markets our historically highly valued.  We typically present this fact against the backdrop of an ensuing necessity of strong consistent economic growth to support said valuation levels.

The volatility of the stock market in the previous two months, when drilled down to simplicity, can be attributed to collective market participants forward looking concern of the economy incurring some challenges in light of you-name-it issue of the day or week.

Whether it be trade war concerns in light of tariff narratives, rising interest rate concerns or an overheating employment market leading to higher inflation and higher interest rates with an ultimate concern of those leading to weakening economic conditions; all point to concerns of the economy being challenged going forward.

To be certain, in any given economic climate the stock market does not celebrate the possibility of a weakening economy.

Being the stock market is a collection of businesses and like any business a favorable economic backdrop provides an environment whereby sales and profits are more easily increased.  Realizing profits are ultimately the lifeblood of a company’s value; a healthy economy provides wind in the stock market’s sails if you will. The above represents one of numerous ways to value the stock market as a whole.  The chart displays the entire value of the stock market as a percentage of the overall economy.  With this, the higher the percentage the higher the valuation of the stock market relative to the economy.

The above view dates back to 1924 which gives us plenty of historical context.  At our current reading we see the stock market, through this valuation measure, is at the highest level since early 2000 which was the highest level from the inception of this chart.

All told, we clearly have a highly valued stock market relative to the level of our economic activity on a historical basis.  If our economy heads notably weaker the stock market will be looking at significant downside, hence our mantra of an absolute need for strong and consistent economic growth.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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