The market’s march higher has been steady and the drumbeat of analysts and pundits is consistently positive. The benchmark S&P500 is now up an amazing 65% since 3/23/20 or just 6 months ago.
TPA would argue that all is well as long as valuation does not matter anymore. That may seem flippant, but a look at historical valuations using Price to Book Value shows that, with only a few exceptions, U.S. stocks are very expensive on a 10-year and 16-year basis.
The table below examines Price to Book Value on a 5, 10, and 16-year basis for Russell 1000, 2000, and 3000 Indexes for the broad index, growth, value, and sectors. The table shows the number of standard deviations away from the mean the current Price to Book Value is for each category for each period. Focusing on the 10-year period, the only inexpensive group is Large Cap Financials, where Price to Book Value is now are 1.01 standard deviations below the 10-year mean.
TPA is using Price to Book Value as it is less variable than earnings measures in times of economic malaise.
Some of the current valuations are in the statistical stratosphere of 3 to 5 standard deviations away from the mean. These are numbers so far out on the normal bell curve as to be rarely even discussed by statisticians.
Here are the most outlandish Price to Book Value measures on a 10-year basis:
* Small Cap TECH 5.19 standard deviations above the mean
* Small Cap Healthcare 5.17 standard deviations above the mean
* Small Cap Growth 4.79 standard deviations above the mean
* Large Cap Discretionary 4.24 standard deviations above the mean
* Large Cap Growth 3.15 standard deviations above the mean
In order for these extreme valuations to move back in line with historical norms, one of 2 things has to happen. Either there needs to be a huge increase in Book Value or a large decline in stock prices.
TPA provides charts below of:
* S&P500 PE 1995-2020
* LARGE CAP GROWTH P/BV – 1995-2020
* LARGE CAP TECH P/BV – 1995-2020
* LARGE CAP DISCRETIONARY P/BV – 2009-2020
* SMALL CAP HEALTHCARE P/BV – 2009-2020
* SMALL CAP TECH P/BV – 2009-2020