What is an advisor to do with all major asset classes in an overvalued condition? We believe the use of tactical management or portfolios that protect against the downside are very timely.
Generally, P/E multiples (price to earnings) are a good measure of risk for stocks, and we think it works particularly well for stock indices. The current level of P/E multiple for the stock market is around 19 times trailing earnings, the valuations look expensive on an absolute basis. The current P/E multiples are similar to the highs in 2007, and not too far off of the peak in 2000. Said differently, we are in the 90th percentile of historical valuations over approximately the last 30 years. To get this P/E ratio back down to a more normal level the market needs to be about 21% lower or around 15 times trailing earnings. The other way to offset this valuation issue is to see a significant acceleration in earnings.
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