Rationalizing high valuations won’t improve future return outcomes.

The reason I say this is because of a tweet from Tom McClellan recently:

Tom McClellan@McClellanOsc

Fundamentalists are worried about the SP500 at 21x earnings. But that is not the relevant price ratio. This is:

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While I have an immense amount of respect for Tom, the exercise of manipulating valuation measures can lead to false conclusions. Take the following chart.

Valuations, #MacroView: Rationalizing High Valuations Won’t Improve Outcomes

The dark blue line is Shiller’s CAPE measure as compared to Tom’s M2 measure and our CT measure. Clearly, both measures show the market is substantially cheaper than Shiller’s smoothed price to earnings model. Moreover, both the M2 and CT measures have a very high correlation of nearly 90%.

Valuations, #MacroView: Rationalizing High Valuations Won’t Improve Outcomes