Every day that the S&P is up more than, say, 1%, I have this feeling of "well, I guess I should sell all my stocks now, because this won't end well," and sometimes I'm right and recently I'm wrong, but it doesn't matter much because I never do it and just keep my roughly half-equities half-cash allocation so I can be about half-miserable all the time, which fits about right. I don't know Peter Oppenheimer and Matthieu Walterspiler of Goldman Portfolio Strategy Research but maybe they share my deep-seated assumption of mean reversion because ooh look 40 pages on "equities are down so in the future they have to be up."
I kid, I kid. They put out a fun research piece on You Should Buy Stocks Now, with a weird punning title but also with lots of nice charts. So go buy stocks, because charts, and also because retail investors are selling them, which has to be a good sign. I guess this chart is the money one though it doesn't say exactly what it looks like it says:
Revert to the mean, little bars! Revert! I feel like I will be taking this chart to my next CFA Exam* for when they ask about equity premiums. This, though, is my favorite chart here, for reasons I can't entirely express:
I interpret this to say sooooomething like "you have no idea what will happen to your stocks or your bonds or anything else so just clip your yield and be quiet and right now stocks out-yield treasuries so buy them," or something, I feel like there's some surprising mojo here, though also the relationship isn't that strong and it breaks down in the 1990s and recent times is when you might want it to work, I don't know.
Anyway, their basic point is "valuation is what drives everything and right now valuation is too low," which I would put as "everything mean reverts so just give up and be half-miserable" but that's why those guys get paid more than I do:
We entered the modern era of globalization, economic growth was highly successful, profit shares of GDP rose to record highs and so did rates of return on capital. The problem is that, at least [in the 2000s], the actual ex-post return for holders of risky assets was amongst the worst in modern history. The explanation to this conundrum, we think, lies in valuation. In effect, all of the good news was already reflected in asset prices before it had occurred.
So if there was a $20 bill on the ground / global economic growth / excess returns for equities over bonds, it wouldn't be there any more.**
And lest you, like those retail investors, are all "well I want a higher ex ante equity risk premium to compensate me for a higher equity risk, jerks," they've got that covered too:
Certainly equity volatility rose sharply around the start of the credit crisis and has remained higher than average ever since, (although has started to fall again recently). But even in the period of heightened equity volatility, this was also true in other asset classes. Indeed ... the ratio of equity to bond volatility has not trended upwards over the recent past and is not particularly unusual. Also the rise in equity volatility was largely a function of the rise in correlation which we have found to be heavily influenced by the ERP [equity risk premium, meaning the ex ante CAPMy expected excess return on stocks not the ex post actual excess return on stocks]. If the ERP trends down over time, so would correlation and, hence volatility.
I guess. They have a nice little history of equities as a thing that respectable research-report-reading people care about, and it begins with the wonderfully named George Ross Goobey giving a speech to the wonderfully named Association of Superannuation and Pension Funds in 1956 saying "hey, guys, you're missing out on equities" and they were all "yeah let's buy equities" and that pushed up equity valuations. There's a part of me that thinks recent decades have seen almost as wonderfully named people saying "hey, guys, you're missing out on just buying the whole equity market" and people increasingly being all "yeah let's not actively manage" and that pushed up correlations, but maybe that's a silly view. I wonder, though, if you subscribed to that view - if you thought of increasing equity correlation as being structural, and if you thought of that as pushing volatility rather than the reverse - if that would change your thoughts on how attractive equity valuations are these days.
* Which will be never. FYI.
** Did you read that link? It's kind of weird, right? Like it's "in a functioning economy there would be no $20 bills on the ground." But who would prevent them from being on the ground? Fourteen-year-old homebuyers is who.