Market Commentary 3/31/17

Valuation is in the Eye of the Beholder

I have noticed a dramatic increase in commentary regarding over-extended valuation levels in the stock markets.  It is not limited to those “perma-bears” who seem to make a living finding reasons to convert your investments to cash, gold, or highly leveraged put option strategies that only they can execute profitably.  The topic has been discussed by research analysts at prominent financial institutions and well-regarded market commentators.  The question has been posed to me by clients, business associates, even late night at the bar with my hockey teammates.  I haven’t been stopped and asked on the street by strangers, but I do wonder if that is next.

There are a number of good reasons to have this discussion, and to have this discussion now.  First, the strength and duration of the market rally that began late last year has surprised many people.  The move has been fueled by a change in investor expectations amid the potential for regulatory and tax reform, rather than underlying measurable economic improvement.  The rally extended valuation metrics stretched over the last several years as central bankers employed controversial policy measures to influence economic activity and the markets.  Finally, valuations should always matter when investing in shares of operating companies rather than market index proxies.


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