Should You Wait For Valuations To Improve?

One of my favorite Wall Street clichés relating to stock market valuations goes something like this: “Valuations don’t matter until they do, and then they matter a lot.”

Actually, you can probably replace the word valuations with any issue you’d like and the phrase would still work. However, since valuations continue to be a rather hot topic in the market these days, I thought I’d spend some additional time on the subject this morning.

If you will recall, we did a pretty thorough review of valuations last month. And frankly, I thought we had exhausted the subject.

However, I talk to financial advisors every single day and stock market valuations continue to be a topic that nearly everybody I chat with is concerned about. The conversation usually goes something like this… “Dave, why should we invest in stocks when valuations are so high? Why don’t we just wait until the next crisis hits and then buy when prices are lower?” (Go ahead; I dare you to try and tell me these thoughts haven’t crossed your mind at some point this year!)

The primary problem with the idea of selling now and waiting for valuations to improve is one of timing. The concept certainly makes sense. Sell high, buy low. What’s not to like?

The issue, of course, is knowing when to sell and then when to buy. (And no, I won’t be offended if you utter the word, “Duh!” right about now.) But here’s a tip – implementing such a strategy based on stock market valuations ain’t as easy as it sounds.

The point to this morning’s meandering market missive is that the general consensus that one should sell when valuations are high and then buy when valuations have improved actually doesn’t work very well. And the folks at Goldman Sachs have some statistics to prove the point.

In the October 2017 Market Pulse publication, the Goldman Sachs Asset Management (GSAM) writes…