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Stuck Here in the Middle with You (July 6th, 2016)
Despite an abundance of fireworks this year - China's slowing economy, a collapse and partial recovery in oil prices, and most recently Brexit - global markets, including the US, have not made much (or given up much) progress over the last 18 months. The S&P 500 almost hit 2100 in December 2014, and at this past quarter's end, there we were again: almost back to 2100. That's been essentially the case for broad global markets as well: a lot of action but no real progress. Given the up and down, but essentially flat, year and half we've just completed, it's easy to forget that many markets, though still pricey, are up over 200% from their March 2009 lows.
What's been holding markets back? In a few words: low growth and high uncertainty … uncertainty around worldwide economic growth, political prospects here in the US (and is anyone really excited about the prospect either way?), and of course most recently, the effect that a Brexit might have on the global economy, especially in Europe and the UK. And, as I said in my commentary the day after the the UK's shocking stay-or-go referendum, no one really knows how a Brexit might (or might not) manifest itself and what it means for European economic affairs. Only time will tell, and I wouldn't be too inclined to make significant portfolio changes as a result of that development as much of the Brexit-induced uncertainty may already be priced into markets.
If there is any bright side in this haze of uncertainty, it's that interest rates remain low by any historical standard, which is good for those trading up or just starting out in the real estate market, although it's certainly been a drag on savers. Additionally, all of this pessimism has driven stock valuations in many quarters of the world to something akin to attractive. The Europe Asia Far East (EAFE) index is trading somewhere between 20% and 45% below US market values (depending on which measure of value you use), while merging markets are cheaper still, trading between 30% and 45% below US levels. Of course, there are often good reasons why some things are cheaper than others; however, that point acknowledged, the single best predictor of longer term performance is low valuations, with low valuation assets tending to produce higher 7 to 10 year returns than more expensive assets. Seven to ten years sounds like a long time (and I know it is!), but those...
For a comprehensive quarterly dataset on market performance
and valuations, here is JPMorgan's quarterly Littlebook -- 70-some
pages of market valuation and performance information that's
hard to beat, and which is made available to advisors for client