QVMM - A Fundamental Shift Higher In Valuations
2024-06-22 23:57:00 ET
Summary
- The bulls have long rationalized that low rates and increased liquidity justify overpaying for the underlying fundamentals.
- The fiscal policies implemented after the pandemic-driven economic shutdown created a surge in demand that further exacerbated an already extended market.
- While a near 40% decline in stocks is quite significant and would undoubtedly send the Federal Reserve scrambling to cut rates and restart “Quantitative Easing,” the reversion would only reverse the post-pandemic stimulus-driven gains.
- From current valuation levels, investors’ expected rate of return over the next decade will be lower than it was over the past decade.
Over the last decade, there has been an ongoing fundamental debate about markets and valuations. The bulls have long rationalized that low rates and increased liquidity justify overpaying for the underlying fundamentals. For the last decade, that view appears correct, as zero interest rates combined with massive monetary and fiscal support increased market returns by 50% since 2009. We discussed this point in “Long-Term Returns Are Unsustainable.” To wit:
A Fundamental Shift Higher In Valuations“The chart below shows the average annual inflation-adjusted total returns (dividends included) since 1928. I used the total return data from Aswath Damodaran, a Stern School of Business professor at New York University. The chart shows that from 1928 to 2021, the market returned 8.48% after inflation. However, notice that after the financial crisis in 2008, returns jumped by an average of four percentage points for the various periods.”