There is a particular “setup” that we’ve historically found to be associated with abrupt “air pockets” and “free falls” in the S&P 500. It combines hostile conditions in all three features most central to our investment discipline: rich valuations, unfavorable market internals, and extreme overextension. (View Highlight)
The present combination of historically rich valuations, unfavorable internals, and extreme overextension places our market return/risk estimates – near term, intermediate, full-cycle, and even 10-12 year, at the most negative extremes we define. (View Highlight)
The chart below shows the valuation measure that we find best correlated with actual subsequent S&P 500 total returns in market cycles across history. MarketCap/GVA is the ratio of nonfinancial equity market capitalization divided by corporate gross-value added, including our estimate of foreign revenues. I introduced this measure back in 2015, and it essentially behaves as an economy-wide apples-to-apples, globally comprehensive price/revenue ratio for U.S. nonfinancial corporations. (View Highlight)
Valuations are informative about long-term returns and the extent of potential losses over the complete market cycle. (View Highlight)
The chart below presents the cumulative total return of the S&P 500 in periods where our main gauge of market internals has been favorable, accruing Treasury bill interest otherwise. The chart is historical, does not represent any investment portfolio, does not reflect valuations or other features of our investment approach, and is not an assurance of future outcomes. (View Highlight)