Walking on Water or Thin Ice

Everyone loves a bull market from blockchain, to rocks, to emerging markets the asset values of the world are going up in price. Sometimes we need to look through the heightened emotion and remember when life was not so rosy. Or in a more meaningful way - respect the bear.

So where are we today?  Well, the markets have provided a nice balanced backdrop for reasonable returns in most asset classes – X energy in Canada has been ugly for the most part but looks like it could be an opportunity today? Markets are running at all-time highs and Cramer (from CNBC's Mad Money) cannot say BUY, BUY, BUY any louder. The caution is that the world is generally getting a bit more expensive. We look at simple fundamentals to determine if the market is expensive or cheap. This is not new technology or something that we are better at than others. More simply put we are just mindful of the other side of the bull – the bear. 

Here is what we see from a valuation perspective. If we look at the S&P 500 index (broad index of stocks) we can see that the price-earnings ratio of this index is now trading at above the 10-year average level ( 17.29 times Price Earnings Ratio) at 21.67 times. This measure of valuation suggests that the market is getting more expensive on a 10-year relative basis.

Source: VIP Wealth Solutions and Bloomberg

The questions on our minds are "now what?" and "is this sustainable?" Looking at the seasonality of broader markets we see these historical statistics for the last 2 months of the year. When the S&P 500 is up 1% in September and October and up 10% year to date over a 14 year time period, the percentage of the time the S&P 500 index is up in November is 71% and for the remainder of the year, the index is up about 86% of the time. The theme in the data suggests Strength Begets Strength. These are strong probabilities of a Santa Claus Rally.

Can this market continue to walk on water and maintain momentum or will fundamentals prevail and the thin ice start crack? No one knows for sure but the allocation of new capital at this level remains daunting.    


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