Valuation tells us little about future recessions
Elevated levels of valuation are often cited as indicators of future recessions. However, in reality they’re not. As the graph below shows, the P/E ratio of the S&P 500 has varied greatly just before the start of past recessions. If anything, it has been somewhat below the long-term average. P/E ratios tend to rise during recessions, as earnings fall faster than stock prices. But despite rising valuations, recessions often offer good entry points as investors position themselves for better times. Valuation is therefore of little use for market timing but can become an important catalyst once other factors fall into place.
As a senior portfolio manager I use charts to illustrate financial issues every day. I tweet my favorites as @jsblokland and was named 'one of the 50 most important people for investors to follow in 2018' by MarketWatch.
Previous editions of the daily sketch can be found on my personal financial markets blog. All graphics provided are collected from Bloomberg data and public websites. They do not always reflect my personal opinion and may also not necessarily reflect the opinion of Robeco. Please cite all references or quote the original source if replicating content.
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