We sense profound frustration among investors and the electorate and it seems to be building. We also wonder what else the central planners can do and what would happen to markets if their meddling was curtailed because the realization that they are doing more harm than good became impossible to ignore. Recent comments out of the Fed seem to suggest growing doubts within it about the effectiveness of its monetary policy regime of the last five years. Meanwhile, the ECB and BOJ are overwhelming markets and crowding out traditional participants in their gigantic QE activities with no real improvement in their respective economic fortunes.
This landscape makes us more patient when others appear to be less so. We do know we cannot fathom blindly paying the current high valuation multiples in any environment, let alone one in which EPS growth is so challenged. We have been discussing for some time now how the typical equity is trading about twice its normal valuation. One can look at a number of different metrics and indices, but the conclusion is often the same.
A rational investor should look at the graph below of small cap stocks over the years and conclude that one does not need to be in any hurry to broadly buy them. Relative to twenty years of data they are enormously expensive when comparing Enterprise Value (Debt + Equity Market Capitalization) to EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization). If you went back further in the data, the conclusion would be the same.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relation.