U.S. equities may look cheap right now, but a new report from Scotia Economics cautions that this is only true if you consider recent market history to be the norm, not the exception.
In a new research report, Scotia Economics examines a variety of equity valuation measures, and concludes that stocks can only be considered cheap relative to the last 20 years or so.
“Virtually every valuation metric that we have considered suggests that equities are under-valued only in relation to the fairly recent past from the 1990s onward but not so in relation to conditions prior to this period, it says.
Moreover, it suggests that the 1990s-to-crisis period should be viewed as the anomaly within history, not the benchmark for the future.
“The 1990s-to-crisis period was marked by excessive risk taking motivated by heavy leveraging and lax regulation that is now at risk of turning excessively tighter,” it says. “This prompted massive behavioural shifts by investors that had less to do with shifting age structures of the population and far more to do with large intra-cohort shifts in risk taking.”
Ultimately, it concludes that stocks are likely fairly valued in a longer-run context, which it says, “makes for a more plausible reference period.”