Valuation: The first leg
The third episode continues our discussion of our “Three-Legged Stool” market model. A three-legged stool will provide a very stable platform when all three legs are strong and supporting the seat. However, if one of the legs begins to become unstable, that can result in a loss of stability for the entire structure. In this episode, we are going to start the process of doing an in-depth look at each of the legs. The first leg we are going discuss is valuation.
The key points in this episode:
- We look at valuation (and whether it is historically higher or lower) because it tends to have an increasing correlation to longer-term future performance as the time frame increases.
- Absolute valuations (especially from a price-to-earnings perspective) are historically high, and this will likely have the effect of dampening future expected returns.
- From this standpoint, we should expect the current decade (the 2020s) to see muted performance relative to the last decade.
- However, at the same time, equity valuations relative to fixed income remain historically attractive, and we believe that this supports current market price levels.
- We highlight this by exploring the factors that, in our opinion, make up the key difference between relative valuations today vs. those of the tech bubble.
We hope you enjoy this video and future episodes to come. Please don’t hesitate to reach out with any questions or concerns.