Normally, when evaluating the markets I focus on valuations, but today I’m going to focus on shorter-term signals.
The reason I normally focus so heavily on valuation metrics is because they help inform investment strategy and rates of return assumed within clients’ financial plans. However, as I’ve stated ad nauseam over the last year, even the most reliable valuation metrics aren’t useful for predicting short-term returns. The reliability of valuations relates to subsequent 10-12 year market returns, which is why I thought I’d provide perspective from a different angle today.
Shorter-term price movements are mainly a psychological phenomenon driven by investor emotions and their inclination towards speculation or risk-avoidance regardless of underlying fundamentals. As you can probably guess, it is far more difficult to forecast short-term returns for this reason. Short-term movements are not necessarily grounded in fundamentals, which is why valuations can occasionally become extremely high (e.g. 1929, 2000, 2018) and extremely low (e.g. 1942, 1982).
Continue reading “The Other Side of the Coin: Short-Term Indicators”
