Bubble Deniers Abound to Dismiss Valuation Metrics One by One
Everywhere you look, there’s a valuation lens that makes stocks look frothy. Also everywhere you look is someone saying don’t worry about it.
The so-called Buffett Indicator. Tobin’s Q. The S&P 500’s forward P/E. These and others show the market at stretched levels, sometimes extremely so. Yet many market-watchers argue they can be ignored, because this time really is different. The rationale? Everything from Federal Reserve largesse to vaccines promising a quick recovery.
How convinced should anyone be when dismissing the message of metrics like these? To be sure, both the market and economy are in uncharted waters. It’s possible -- perhaps likely -- that old standards don’t apply when something as random as a virus is behind the stress. At the same time, many a portfolio has been squandered through complacency. Market veterans always warn of fortunes lost by investors who became seduced by talk of new rules and paradigms.
“Every time markets hit new highs, every time markets get frothy, there are always some talking heads that argue: ‘It’s different,’” said Don Calcagni, chief investment officer of Mercer Advisors. “We just know from centuries of market history that that can’t happen in perpetuity. It’s just the delusion of crowds, people get excited. We want to believe.”
Robert Shiller is no apologist. The Yale University professor is famous in investing circles for unpopular valuation warnings that came true during the dot-com and housing bubbles. One tool on which he based the calls is his cyclically adjusted price-earnings ratio that includes the last 10 years of earnings.