It is said that markets climb a wall of worry. That certainly feels true this year as the wall seems ever extending higher and the equity markets are content to follow it. The NASDAQ index notched another new closing high today. Up well over 20% this year, the valuation of the tech-heavy index exceeds 20x next year’s earnings estimates. Companies are just starting the earnings season now so it is yet to be seen whether this lofty valuation can be supported by realized rather than hoped for growth. It is also often said (and proven true) that valuation is a poor timing tool. Just because the stock index is expensive does not mean it cannot become more expensive until it reverts. And why not? Despite the Fed raising short-term interest rates and being on the brink of letting their massive balance sheet start to run off, long-term yields still have yet to budge. So, you can have either a 2.3% total return expectation from a ten-year US Treasury today (likely matching inflation over that time) or you can take the heartburn of equity for a bit more (2% dividend yield on the S&P 500 plus some earnings growth over time). Many have called for the market to correct based upon valuation but so far it edges higher with steadily decreasing volatility – painful to those who sought to time the markets this year or in recent years and have missed significant returns. In fact, the best thing going for this bull market is that after almost eight years people still do not believe in it.
On our end, we believe the best approach in this environment is to seek value to the best of our ability, seek to own quality assets that you are comfortable holding through a down cycle, and have a suitable time horizon to weather the volatility when it comes again.