As we enter the fourth quarter, speculation relating to the valuations in the equity and fixed income markets is plentiful.
There are many concerns — economic growth has been modest, corporate earnings have been flat, the upcoming U.S. election has increased uncertainty, and the consensus is that the Federal Reserve will increase the federal funds rate in the fourth quarter.
Yet, many market valuations have approached all-time highs. Returns in the U.S. market have been solid — the return of the S&P 500 Index year-to-date is 7.84% and the return of Barclay’s US Aggregate Bond Index is 5.79%.
It is natural to ask “Are the pundits right that the market is overvalued?” This note will review the current state of some of common valuation factors and argue that any conclusion with respect to the appropriateness of market valuations should be drawn carefully.
One thing we do know is that the future is inherently unpredictable. Any attempt to categorize the market as overvalued or undervalued is little more than a guess.