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Calm Before The Stock Storm

The cyclically adjusted price-earnings ratio (CAPE) is among the most potent academic finance concepts. It estimated long-term equity returns reliably. 150 years of equity market history is plotted in the first chart below. The broad-based US equity market is currently priced at about a 34 CAPE, which coincided with a negative return during the subsequent ten years. (Source: The ...
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Collecting Pennies In Front Of A Bulldozer

2020 is almost over and it will take its unique place in history. Imagine that someone told you a year ago that a global pandemic hits the world and leads to the most severe economic downturn since the Great Depression. Yet, equities trade at all-time highs near year-end. You would have probably questioned that person’s sanity. The market path did ...
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The Santa Rally Approaches A Halftime Break

Stocks continue to behave unintuitively for most investors as a bubble inflates. We’ve shown various valuation metrics in the past few write-ups here. Fundamentals have not changed as valuations remain stretched and not sustainable. Nonetheless, we made a case to buy equities short-term. The environment remains probably constructive for equities until year-end. However, the risk/reward relationship is not as good as ...
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Ride That Wave

Investors feared adverse effects on the global recovery after the coronavirus situation escalated in Europe once again. Consequently, European equities posted their worst performance in three months and dragged the US market lower. Nonetheless, the situation led to an opportunity to buy the dip just as positive seasonality arrives. The Upside Trend Is Intact The S&P 500 remains overvalued and ...
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The Policy Fiasco

Policymakers in most industrialized economies have been on a spending spree during the last few decades. It seems as if governments and central banks want to smooth the business cycle entirely in order to avoid recessions. Despite benevolent intentions, their track record speaks against their actions. Business cycles are a typical characteristic of capitalist economies. The pattern reoccurred reliably throughout ...
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Tulips & Tech

The famous economist John Maynard Keynes recognized long ago that markets can deviate from their fundamental value for an extended period. His insight applies to U.S. equities today. As measured by the S&P 500, the broad-based market trades well above the historical average according to the 10-year cyclically adjusted P/E ratio. Stocks have been only before the 1929 and 2000 ...
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