On February 1, 2007, WisdomTree launched its U.S. Earnings family of Indexes. Over the course of this nearly 11-year live track record, many clients have asked us why we chose to weight these Indexes by earnings.
What’s happening in U.S. equities today provides an environment for a better answer than any we have been able to provide thus far. In nearly every conversation that we have the investor community seems to agree on the following:
1. Equity Multiples Are Elevated and Rising: U.S. equities1 have been increasing, and at different times in the second half of 2017 they have continued to hit and establish new record highs. One consequence of this has been that valuation measures, such as price-to-earnings (P/E) ratios, have been increasing and currently are hitting the higher end of their established historical ranges. While some may counter that bonds, seen through the persistent low interest rate environment, remain even more expensive than equities, it is becoming harder to argue that U.S. valuations represent cheap values today, at least in a broad market sense.
2. The U.S. Economic Expansion Has Been Going on for a Long Period: We’ve had 100 months of economic expansion.2 According to the National Bureau of Economic Research, which has been tracking U.S. economic expansions and recessions since the 1850s, there have been only two periods representing longer economic expansions than what we’re currently experiencing: February 1961 to December 1969 (106 months) and March 1991 to March 2001 (120 months).3
The Human Mind Has a Tough Time with These Data Points
We hear a lot of people combining these two ideas and coming to very similar conclusions:
1. The market has been going up for a long time, is at or near record highs and is ripe for a correction due in part to a more expensive valuation.
2.The U.S. economic expansion has been going on for so long that many wonder when the party will end.
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