Extreme Valuation Produces Poor Risk/Reward for S&P 500

The P/E ratio of the S&P 500 is currently at its second-highest level since 1950, trailing only the peak reached during the internet bubble.

While a decline in interest rates to zero or negative justifies a tolerance of higher valuation metrics compared to during a normal interest rate environment, it does not justify indifference to valuation. All businesses have prices at which they are either attractive or unattractive investments (based on their ability to produce risk-adjusted returns).

Rampant investor optimism has reached extremes that rarely, if ever, has been reached previously which has produced an indifference to valuation and other aspects of risk.

The result, in our opinion, is a high-risk market environment. We discuss our risk calculations at length in the recently published March issue. We also update our views on global markets, our current investment positions, and our methods to optimize risk/reward.

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