over which to gauge an investment’s potential for long-term success
across market cycles. We think central bank policy normalization
could inspire a normalization in market dynamics.”
A result of the massive central bank interventions following the
financial crisis changed how the market valued stocks.
“By reducing the cost of capital to near zero, Fed stimulus
made risk assets more attractive on a relative basis and distorted
equity market dynamics—including correlation and dispersion—
that allow managers to distinguish among stocks through fundamental research. Correlation measures the degree to which stocks
move in relation to one another, while dispersion tracks the magnitude of relative performance,” Amato, D’Onofrio, and Rago wrote.
“Low correlation (an abundance of stocks whose movements are
not closely aligned) and high dispersion (wide differences between
the best- and worst-performing stocks within an index) afford
greater opportunity for fundamental active management to iden-
tify winners from losers. Trends in these metrics since the financial
crisis have favored passive.”
As central banks unwind stimulus, stocks may again be more
heavily weighted on fundamentals. The tide that favored passive
investing may be turning.
Asset owners have to navigate nosebleed valuations even as the
market backdrop changes dramatically in 2018. The sustainability
of synchronized global growth, the questionable role that inflation
will play, and the value of picking individual stocks as correlations
recede and dispersions rise will take center stage in the year ahead.
The only thing certain about 2018 is that it promises to be a departure from the past. —CIO
Shiller PE ratio for
the S&P 500
Current Shiller
PE Ratio:
31. 15
Mean: 16. 8
Median: 16. 14
Min: 4.78 (Dec 1920)
Max: 44. 19 (Dec 1999)
Cyclically Adjusted PE Rataio
20
10
Oct ’97Oct ’98Oct ’99Oct ’00Oct ’01Oct ’02Oct ’03Oct ’04Oct ’05Oct ’06Oct ’07 Oct 08Oct ’09Oct ’10Oct ’11Oct ’12Oct ’13Oct ’14Oct ’15Oct ’16Oct ’ 17
10 Year Treasury Yield
7%
6%
5%
4%
3%
2%
1%
0
Oct ’97Oct ’98Oct ’99Oct ’00Oct ’01Oct ’02Oct ’03Oct ’04Oct ’05Oct ’06Oct ’07 Oct 08Oct ’09Oct ’10Oct ’11Oct ’12Oct ’13Oct ’14Oct ’15Oct ’16Oct ’ 17
Source: Multpl
Source: Multpl
US 10 Year Treasury Yield
Current 10 Year
Treasury Rate: 2.35%
Mean: 4.58%
Median: 3.86%
Min: 1.50% (Jul 2016)
Max: 15.32% (Sep 1981)
