The Most Useless Barron’s Quote Ever
By Roger Nusbaum, AdvisorShares ETF Strategist
The Barron’s Streetwise column had the single most useless quote I’ve ever read in the magazine (I go back to the late 80’s with it) over the weekend.
The S&P 500 currently trades at 15.3 times forward earnings, but with the VIX at current levels, its valuation should be closer to 15. That would imply an index price level of around 1900, if 2016 estimates are accurate—1.1% below Friday’s S&P close of 1922.03.
It relies on the forward PE which can change at any time, it relies on the VIX which could move 10% in either direction without much effort, and it relies on the level of the S&P 500 which could obviously also move significantly (as I write this on Sunday, the SPX fell 6% last week so some sort of snap back should not be a surprise even if it is short lived).
There is also an assumption that at least two of the inputs will be static. If the market quickly drops 1% at the open of the next trading day I would expect the VIX to post some sort of increase. Does that make the market relatively cheaper or relatively more expensive? What if instead of a whoosh down on the next trading day the market rockets higher and somehow the VIX goes up (there is not a perfect negative correlation for all times and all durations)?
The opening week of 2016 put in a large decline for a five-day period and of course there was plenty of media coverage about it being the worst first week to a year ever and maybe there were other ominous stats too. But forgetting the calendar for a moment, as I have said many times here before, there is nothing happening in the market that hasn’t happened before.
I don’t get the sense that people are actually that worried about last week’s decline so it may be a little early to bring out the there is nothing happening in the market that hasn’t happened before comment but anyone prone to worry might soon worry if the market keeps going down so it that light it is not too early for this reminder.
Whenever the next bear market/crash/crisis comes along the details that will cause it will be different but the market action will not be different. It won’t be an internet bubble or a great recession, we already had those, it will be different and like those other events people will think that it will be different in the market but it won’t be. The equity markets will follow the same path they always do, they will go down a lot, stop going down and then turn around and go on to make a new high. The only variable is how long it takes.
Good for anyone who can successfully trade the next bear market/crash/crisis but anyone who doesn’t trade it successfully simply has to wait. This assumes a proper asset allocation and not selling out the portfolio in a panic.
Anyone who has been investing for more than ten years has likely endured more “scary declines” than they remember. And there is a good chance that if this one becomes scary, it too will also be forgotten in due time.