bear market lows, bull market highs and the current market

David_Snowball

Hi, guys.

In a slightly-grumbly post last week, in which I described the current market as "senseless" and allowed that I was reluctant to judge sensible managers for their failure to thrive in its midst, I made the observation that the February bear low was still higher than most bull market highs. Setting aside the question of whether it's reasonable to disregard what might be several years of underperformance (it works for me as long as the full cycle performance is what I signed up for, but I recognize that other folks have shorter time horizons and more intricate sell disciplines), there was also a question about whether the "higher than bear lows" claim was correct.

Several fund managers I'd spoken to last week made that observation in passing. Here's the Leuthold description of current valuations, from their March 2016 Perception for the Professional:

While the past several month's reversion in [valuation] measures has certainly wrung some of the risk out of the market ... the potential downside risks remain substantial. We compared current readings on all four valuation measures [p/e on TTM earnings, p/e on 5-yr normalized earnings, p/cash flow, median price-to-book, all for S&P 500 stocks] to the average recorded at the last four bull market highs, and found that - despite the setback of the last nine months - the median stock still trades at a valuation about 1% above the levels seen at the typical cyclical bull market high. If the bear market reasserts itself ... potential downside is estimated at -29%.

The Total Stock Market is up about 2% since then.

To be clear: I'm not apocalyptic, I'm just wired to be cautious. More importantly, I detest making factual claims (as I did in my original post) without being able to point to the specific evidence behind the claim.

For what that's worth,

David

Old_Skeet

Hi @David_Snowball,

Thank you for posting your thinking.

I, too along wth some others, am of the posture that stocks in general are richly priced. With this, I am thinking stocks will go soft as we approach and move through summer. Hopefully, by the time fall arrives and we have gotten past the November elections corporate earnings will have improved and this will be the set up and fuel needed for a late fall stock market rally. (Just my thinking).

Thanks again for posting your perspectives.

Old_Skeet

MikeM

@David_Snowball, Speaking of Leuthold , I'm curious to see if you made the decision to move money from FPACX to LCORX. After reading your thoughts and looking into the fund, I decided to go with LCORX as a more conservative hold in my portfolio. Looks like by the end of 2015, they were down to about 40% net equity holdings. Just wondering what you ended up doing.