Market Minute - September 12, 2018

by Scott Rosenquist, CFA

Valuation Check-In

The U.S. equity markets are now trading near record highs surpassing the levels seen back in January.  The Dow Jones Industrial Average has yet to reach new highs, but the S&P 500, Russell 2000, and the Nasdaq all continue to trade at record levels.  The sell-off experienced in late January seems long ago and many investors may be wondering where the market stands now in terms of valuation. 

The chart below from JPMorgan highlights the valuation of the S&P 500 over the past 3 decades.

Yield Curve Graphic.png

While there is no metric that is accurate all the time, the P/E ratio is widely followed by many investors as a reference point.  The chart also offers additional valuation measures, but my focus is on the forward P/E ratio which uses the current price divided by earnings estimates for the next 12 months.  In the short-term, many variables can affect market returns but over longer periods of time, valuation becomes a more important driver of returns.    

Fair value is not an exact number but more of a relative range based on historical averages.  As the chart shows, the forward P/E at 16.8 is slightly above the 25-year average of 16.1.  This is far from “nose-bleed” levels, but not exactly the “cheap-seats” either.  Average valuations coupled with a strong economic backdrop support continued exposure to equities at this time. 


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Although general strategies are revealed, this post is not intended nor does it reflect transactions within any one account. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All data and information is gathered from accurate sources but is not warranted to be correct, complete or accurate. Investments carry risk of loss including loss of principal.  Past performance is never a guarantee of future results.

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