Valuations, Your Portfolio, and a Bigger Picture

John owens

CFP®, EA, ECA, CPWA®

MANAGING PARTNER

It always surprises me that I often get more questions nowadays when portfolios and markets are doing well, than when they’re declining. 

In early August when the market sold-off quite quickly - only to recover quickly as well - my inbox was pretty quiet. But this week I’ve had several questions about valuations and folks feeling some pause about markets today. 

It’s that uneasy feeling we get when things seem to be going… too well? Kinda like when you wake-up well rested, the water pressure is great in the shower, the sun is out but it’s not too humid, your computer fires up without issue, you avoid burning your tongue on the hot cup of tea you’re sipping and you’re JUST WAITING for the shoe to drop because this is too friggin good to be true. 

I get it. Sometimes things going well cause us to think that we’re just seconds away from the shit hitting the fan and knocking us on our ass. 

And I understand the fear and anxiety in some of these emails - valuations for US Large Growth stocks are exceedingly high - nearly 150% of their long-term average. Enough to give any of us pause. 

But what if there was reason to have a smidge more optimism when you looked under the hood? What if there was more data that told a slightly different story that laid the groundwork for not spilling that hot tea and having your laptop implode before lunchtime? 

You see, the only folks who should be VERY concerned about those valuation levels are folks who only invest in either big tech names or exclusively in the S&P 500 - because they’re the ones playing riverboat gambler in the current environment. 

When we look at other asset classes, we see a much more reasonable - or perhaps even optimistic - story.  

  • US Small Company Value stocks are trading pretty close to their 20-year PE average.  

  • International Developed stocks are trading in line with their 20-year average PE while also sporting a dividend of 3.2% on average (compared with 1.4% dividend on the S&P 500 currently)

  • Emerging Market stocks are also trading near their 20-year average PE

  • In the current interest rate environment, US, International, and Municipal bonds are trading at a discount valuation-wise, with an opportunity to appreciate if rates decline. 

So while there is a piece of a diversified portfolio today that's expensive, there are other pieces that are fairly valued by historical standards, and some that are "on sale" so to speak in the bond space. 

While ANYTHING can happen in the short-term, and with an election, potential rate cuts, and a slowing labor market able to deliver a shock; it’s also important to remember that valuations can stay stretched for a long-time, they can come back down to reality in a correction, or earnings can catch up with them to make them more reasonable. 

None of us have a crystal ball for what will happen here in the near term.

But we do know that having exposure to an array of different asset classes means they won’t all move in unison over the long run, and that while there’s always a risk our second cup of tea burns our tongue or the water pressure isn’t as good tomorrow - long-term investors often have good reason to be optimistic about the long-term if they’re truly diversified. 







AJ Grossan