Low Valuations Imply Better Long-Term Performance

Market Blog

The dizzying volatility over the past few weeks has left all of our heads spinning as we wait for containment efforts in the United States and elsewhere to help slow new cases of COVID-19 (coronavirus). Public health is of course our primary concern. But beyond that, from an economic and market perspective, there are many difficult but important questions:

  • What will the economic impact be for the United States?
  • What will the government stimulus look like?
  • When will consumer spending return to pre-outbreak trends?
  • How big of a hit will corporate profits take?
  • Where will bond yields bottom?

We will try to answer these questions in upcoming publications. Many of them will be covered in our next Weekly Market Commentary on Monday, March 16.

We think fewer people are thinking about just how much cheaper the selloff has left stocks and what those lower valuations might mean for returns. That’s what we answer here. Our LPL Chart of the Day shows the relationship between the stock market’s price-to-earnings multiple (the S&P 500 Index in this case) and performance over the subsequent 10 years. As you can see, the relationship historically has been tight. Should this relationship hold, the recent correction puts long-term investors in a better position as they look forward.

By the way, this long-term relationship works the same way for the bond market. Based on the current 10-year Treasury yield at about 0.7%, the best guess at returns for the 10-year Treasury over the next 10 years is below 1% per year. Bottom line, it might be a good time for long-term investors, where appropriate, to start thinking about selectively shifting some of their fixed income holdings over to equities.

 

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