Thursday, May 7, 2015

Yellen Yell'In

Federal Reserve Chairwoman, Janet Yellen's recent remarks about "quite high" equity prices in the U.S. and the risk that poses to the broader economy. In Fed speak, she is saying; as prices rise, so too does the tendency of market participants to take on ever greater risk. She is right on - remember 2008?  Risks are present, however they always just how expensive is the market and what do we do?

Note: This chart excludes the 2008/09 meltdown, where earnings dropped significantly and P/E's went through the roof. Normally you would see a spike on this chart in late 2008 and early 2009.

It's not hard to tell from this chart that the market is not dirt cheap or priced wildly high. You can see that from 1935, we have basically seen a trough of 10X and a peak of 22X. It should be noted that interests rates were much higher at almost any point prior to 2008. With record low interest rates, it appears that their is still room for the averages to move higher. However, any move higher will likely be in a choppy fashion, as the market continues to worry about interest rate hikes, GDP growth, and unemployment.  Bargains are harder to find, but as the famed Canadian investor Peter Cundill once said - "there's always something to do". There are still pockets of value. Sectors including U.S. money center banks, industrials (auto's, engineering firms), large cap technology and energy offer value. But remember, always have a margin of safety! A black swan can appear at anytime. If indices move higher, we will continue to harvest our holdings and raise cash. Bull markets generally mature on optimism and die on euphoria - we don't see any euphoria.

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