Without a doubt, we are off to a volatile 2015.  We are now experiencing another round of very volatile action in the market.  And markets go up over time but, it seems like many moons ago since we’ve experienced a significant and sustained decline in the stock market. This current market cycle is now approximately 71 months old — and the older this bullish run becomes — the greater risk lies in getting caught holding the bag when equities falter.

For some perspective, let’s first acknowledge that the typical duration of a cyclical bull market over the last 100 years has been approximately 40 months. One could ask… “are we past due for a correction or a material decline in equity prices to potentially reset expectations before the next bull market  can begin its advance?”

Both short-term and long-term indicators I watch on a regular basis are pointing to the markets operating in the “riskier end” of the spectrum right now. While the  price/revenue ratio of the S&P 500 is not the “be all,end all” metric, it is, however, now reaching in to historically high-end territory.  And the chart below shows that aside from the Internet bubble of the late 1990’s, the price/sales ratio of the S&P 500 is at generational highs; 1.71.

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Put another way, the market is pricing revenues at a greater level than the biggest bull market of the last 40 years that started in 1982 when one could easily argue that many more factors were in the market’s favor. For example, during that market cycle, baby boomers were allocating more heavily to the market through 401(k) plans, companies still operated defined benefit plans which led to increased contribution to equities, real personal incomes were rising at a much faster pace, and the U.S. was more dominant globally.

So… how high above historical norms are we?  The ratio is above 1.25 (the point considered “excessive”) only 28% of the time with less than 1% annual returns at that level or higher. We’re now at a level nearly 40% higher! For those inclined to look at charts, take a close look… it will make you think a little bit.

Of further concern to me is that there isn’t a sector of the market that’s a “bubble” which could be avoided.  Rather, everything seems overvalued from a historical perspective.  So while technology stocks led the market lower from 2000 to 2002 and financials cratered in 2008, today everything in the market looks vulnerable.

In my opinion, this makes the market more risky given that there are far fewer places to protect assets in a the next bear market. Therefore, we will continue to remain cautious in our approach as well as nimble and active in our style of money management in order to mitigate potential losses.

The return potential just doesn’t seem to justify the present risks.

As always, please feel free to call with any questions or concerns.

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