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Should You Fear Narrow Markets And ‘Euphoric’ Valuations?
Regular readers know I have a love-hate relationship with narrow market laments. The same's true of
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Should you fear narrow markets and ‘euphoric’ valuations?
No, as long as you can sleep with one eye open and have the ability to sell whatever before everyone else has R-U-N-D-E-D off.
Do. Not. Seek. The treasure.
This helps explains why we keep having V-shaped recoveries and buy the dip has worked because buying even a 5-7% discount in large-cap tech stocks is a no-brainer buy. Just like bitcoin or gold has a scarcity value, so do the best large-cap tech stocks, which have become a safe haven rather than consumer staples for example. Passive flows also keep a bid under the large cap tech stocks.
I recently read a piece saying that, along with the higher level of demand for equities, the market today contains proportionately more investors, than years ago, with a higher risk profile.
H-Man, always a matter of context, are you long or short the market? If your short, narrow markets and “Euphoric” valuations are your friend. If your long, it may be time to rethink things depending on your time horizon, you may want to adjust or simply hold the course and bulldoze ahead. It being understood that you never know exactly when a “Euphoric” valuation is no longer euphoric.
The daily question for investors; are we or aren’t we in Kansas.
It’s one of those basic assumptions we have but — short-term returns can’t be predicted based on valuation but long-term returns can to an extent. The data over the long term includes various idiosyncratic crises which are one-off in nature. What’s the causal relationship thought to be like? Equities have further to fall, or high valuation indicates excessive optimism? If you use 10- or 20-year windows then rolling 10-year returns from the same asset produce non-independent observations (eg. dotcom bust and gfc featured in data multiple times and preceded by high CAPE) but if you use independent observations then you have very few datapoints (eg. 5 separate 10-year periods with 1 ongoing since 1980, per asset) from modern markets. If the difference vs. static buy and hold is small, tax drag and suboptimal strategy execution could easily wipe out the difference. For the well informed people, what does the literature on this say?
Today XLK +1.1% while every other sector ETF down -0.5% to -1.7% . . . is this what narrow euphoria looks like? Me no like.