Are the High Valuations Dropping?


Past performance is no guarantee of future results.  Trend signals are proprietary research of Fortunatus Investments, LLC, a Registered Investment Advisor with the Securities and Exchange Commission (SEC). Reference to registration does not imply any particular level of qualification or skill.  Prior to June 2014, Fortunatus Investments was a wholly owned subsidiary of Executive Wealth Management, LLC and they continue to share common ownership and control. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation.  One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data. 

A midlevel broker gave me a tip. “Call cul-de-sacs,” he said. “Rich people live on cul-de-sacs.” “That makes sense,” I said, and I then went to look up cul-de-sac in the dictionary.

Barron’s columnist Jack Hough recalling useful advice he received about cold-calling when he was a trainee with the brokerage firm Merrill Lynch in the early 1990s. Last week, Merrill Lynch Management announced that new brokers would not be allowed to make unsolicited sales phone calls (otherwise known as “cold calls”) and should alternatively contact prospects through social media platforms.

EWM News

Valuations are always a tricky subject. We often hear the pundits tell us that valuations are high or low. Valuations represent a measure of how much the market is willing to pay for earnings, or more precisely, earnings per share. We have discussed this in detail in the past and the several ways that we view earnings and valuations. We know that valuations have been elevated since the middle of last year. At that point, stock prices had fully recovered from their COVID lows but analysts’ expectations of earnings had not recovered. The talking heads were beginning to worry about the possibility of a year 2000 situation forming where valuations track a shooting star up until the moment that the market realizes that earnings are over-valued and prices plummet. We know that the high valuations of 2000 resolved themselves with the Nasdaq 100 down -80% and not recovering to new all-time highs for another 13 years.
The chart below shows in detail what has happened recently. Valuations are measured in the chart by the next twelve month price-to-earnings ratio (NTM PE) and are tracked with solid blue line. Following the depths of COVID, the Nasdaq 100 shot up (the yellow dotted line below) with no increase in forward earnings. This caused the PE multiple to move right in tandem with the price increase until September 2nd, 2020. This was peak PE. Since then the PE multiple has decreased by 16% while the price has increase by 10%. This is the best resolution that we can hope for when there are elevated multiples. This means that earnings expectations are rising faster than the price is rising. As of now this is a good sign. If we had been headed into a disaster, then earnings would not be heading higher right now.

Nasdaq chart

The Nasdaq 100 index got within spitting distance of pre-COVID valuations in the middle of May. One of the most important things to remember is that valuations are not stationary, and the price that people will pay for something, in this case earnings, is very dependent on everything else that is happening in the market. Valuations can stay high or low for extended periods of time. Just because we are at a high valuation does not mean that the stock market will fall, likewise if valuations are low in comparison to historical average that does not mean that the stock market will rise.
We are always looking for signs of trouble on the horizon, and there are always signs of trouble on the horizon. As for now, this is a good sign that we would like to see more of. 

Model Updates

There were no trades in the Fortunatus models during the week ending on May 29th, 2021.  The major equity market sectors remain in a long-term favorable trend, and the Fortunatus Asset Allocation models are near their maximum allowable equity exposure with domestic stocks favored over international shares.

On A Lighter Note

Even the most socially relevant pop songs can lose their potency as the important issues of the day fade away into the mists of time. For example, back in 1953, Sir Edmund Hillary and Sherpa mountaineer Tenzing Norgay became the first people to reach the summit of Mount Everest creating a media sensation. Everything associated with this adventure became famous, even the Himalayan yaks used as pack animals on the journey.  In fact, many people thought if these beasts of burden could help men scale the world’s tallest mountain, then surely it wouldn’t be too burdensome for the beasts to help with everyday domestic tasks.

So soon every fashionable person had hired a yak to help with household chores. Unfortunately, people got nothing but flak from their yaks, and it was a constant battle with the cattle to do the simplest jobs without hearing demands for more money and free time.  It seems that fame had made the yaks more party animals than workhorses. By 1958, the R&B group the Coasters decided that this pressing social problem needed to be addressed in song, so they recorded “Yakety Yak”, the poignant story of the downfall of an argumentative yak named “Yakety” . The opening stanza is included below:


Take out the papers and the trash
Or you don’t get no spendin’ cash
If you don’t scrub that kitchen floor
You ain’t gonna rock and roll no more
Yakety yak (don’t talk back)

So you can see that what appears to be silly nonsense to the modern listener was actually a keen social commentary on the times. Next week, we’ll detail how the rock band Chicago chronicled the devastating global clock shortage of 1969 with their top 10 hit “Does Anybody Really Know What Time It Is?”

The Coasters – Yakety Yak

Executive Wealth Management (EWM) is a Registered Investment Advisor with the Securities and Exchange Commission. Reference to registration does not imply any particular level of qualification or skill. Investment Advisor Representatives of Executive Wealth Management, LLC offer Investment Advice and Financial Planning Services to customers located within the United States. Brokerage products and services offered through Private Client Services Member FINRA/SIPC. Private Client Services and Executive Wealth Management are unaffiliated entities.  EWM does not offer tax or legal advice. Please do not transmit orders or instructions regarding your accounts by email.  For your protection, EWM does not accept nor act on such instructions. Please speak directly with your representative if you need to give instructions related to your account. If there have been any changes to your personal or financial situation, please contact your Private Wealth Advisor. 

Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.

1 Week = closing price on May 21, 2021 to closing price on May 28, 2021
1 Month = closing price on April 28, 2021 to closing price on May 28, 2021
3 Month = closing price on February 26, 2021 to closing price on May 28, 2021

 YTD = closing price on December 31, 2020 to closing price on May 28, 2021All information and opinions expressed in this document were obtained from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and opinions as well as any prices indicated are current only as of the date of this report, and are subject to change without notice. Material provided is for information purposes only and should not be used or construed as an offer to sell, or solicitation of an offer to buy nor recommend any security. Any commentaries, articles of other opinions herein are intended to be general in nature and for current interest. Some of the material may be supplied by companies not affiliated with EWM and is not guaranteed for accuracy, timeliness, completeness or usefulness and EWM is not liable or responsible for any content advertising products or services.

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