With the release of a near zero first quarter GDP number it became clear that the economy is showing few signs of the robust activity that many market participants and prognosticators had predicted to start the year. Weather may be partly to blame, but it is not nearly as responsible as many proclaim. Earnings reports for the first quarter were not as well received as they had been in prior periods and that is weighing on sentiment as well. The turmoil in the Ukraine has not helped, but we think equities are mostly falling under their own weight.
One big picture fact still trumps everything else that an investment professional should be conveying to investors at this point: in looking at many decades of data, based on price to revenues, U.S. equities are broadly the most expensive they have ever been. That really should be all that matters to anyone tasked with making investment decisions. No amount of stock picking ability can overcome that reality. Therein lays the rationale for our cautious equity positioning. We are enormously glad we can pursue value on the short side.
Below the surface of the S&P500, a good deal of damage has already occurred in many stocks in recent months, particularly those that were the most overpriced. You might not believe it, but the average stock in the Russell 3000 is down about 20% from its 52-week high.
Our sincerest belief remains that our future success is purely a function of our willingness to remain on the right side of historic valuations.
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 relations.