Since we estimate prospective return/risk on a blended horizon of 2-weeks to 18 months, we are not making a statement about the very long-term, but only about intermediate-term horizons (prospective long-term returns have certainly been worse at some points, such as 2000). As always, our estimates represent the average historical outcome that is associated with a given set of conditions, and they don’t ensure that any particular instance will match that average. So while present conditions have been followed by extraordinarily poor market outcomes on average, there’s no assurance that this instance can’t diverge from typical outcomes. Investors should ignore my concerns here if they believe that the proper way to invest is to bet that this time is different.
In March of this year, our estimates dropped into the worst 2% of historical observations, and fell to the lowest 0.5% of all observations by April. Note that the only way to achieve an extremely overbought market is for prices to move up through less extreme overbought conditions, without consequence. Likewise, the only way for market conditions to become as extreme as they are at present was for the market to advance despite progressively worsening conditions, without consequence. So we have been wrong, and uncomfortably so, during this advance. The bet of investors, of course, is that global central banks can provide a panacea against the consequences of the rich valuations and excessive debt burdens that those same central banks are responsible for encouraging. Again, investors should ignore my concerns here if they believe that present market levels do not adequately reflect and discount those hopes, or are convinced that these hopes are sufficient to negate other historical evidence.
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