Best of Times, Worst of Times

The bad news is that there are very few areas of the US stock market that are particularly cheap right now. 

The good news is that a) investors aren’t limited to just US stocks and b) there’s always something dropping so that expected returns are actually growing rather than shrinking.

My friend Meb Faber sees the global equity picture as glass half full at the moment for exactly this reason. Read his response to the valuation question from a new interview at

*** What’s your latest take on U.S. stock valuations?

Meb Faber: The U.S. market is a little bit expensive. And one of the challenges of the valuation is that people want to fall into one of two camps. They either want to believe that things are cheap (“It’s screaming buy!”) or that things are expensive (“It’s going to crash!”). People think in very binary terms, and they hate thinking in terms of it being a spectrum of future probabilities.

It’s boring to hear, but the more the market goes up, the fewer future returns there are going to be over the next, say, 10 years. The more it goes down, the higher the returns will be. We expect future returns to be in the 4 to 5 percent nominal range going forward.

It’s not horrific. It’s better than bonds. But you run into some problems as the market gets more expensive. The higher it gets, the higher the chance you have of a large drawdown.

There’s a study out now that tracked the median stock valuation for the S&P 500, and on a price-to-sales basis, going back to 1960s, it’s the highest it’s ever been—ever!

The good news is most of the rest of the world is really cheap, and in some places, it’s exceptionally cheap. In our global value fund, we look at the bottom quartile of developed and emerging countries, and that bucket is the cheapest it’s been since the bottom in 2009, the bottom of 2003 and the early 1980s. And if you wondered what the three best times to invest in our lifetime are, those are pretty good starting points.


Meb is the founder and CIO of Cambria Investment Management. Follow him on Twitter here

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