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U.S. stock market returns are likely to be subdued in coming years, according to Steve Blumenthal of CMG Capital Management Group.
Blumenthal, at the Strategic Investment Conference 2018 in San Diego, said most metrics, from price-to-earnings ratios to dividend yields, are extremely overvalued. And it’s just a matter of time before they return to fair-value levels.
Blumenthal looked at Ned Davis Research that showed returns from periods with valuations like today’s. The median five-year return from periods with a Shiller P/E of 25 or higher was 1.23% annualized. The range was -6.66% up to +19.68% annualized.
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The investor noted that when we break today’s stock market SPX, +1.46% valuations into quintiles, we’re in the highest quintile. As a result, forward returns look ugly. On top of that, high valuations come with high risk. And that means the level of probable drawdowns in the stock market is high.
He thinks keeping an eye on the bond market is key, as most assets are priced-based on a risk-free rate. And when interest rates move up, markets typically do not perform well.
In this environment, risk management is critical. Blumenthal remains bullish but increasingly cautious. He advised investors to be more defensive and prepare for great buying opportunities when a correction arrives. Gold is one of the hedges that investors turn to in times of volatility (check the gold price).
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