Anyone who thinks the financial markets will continue to behave for the next five years the way they have for the last eight certainly enjoys walking on the sunny side of the street.

Some keen observers might divide the current bull market into two phases. The first ran from 2009 through 2012 and was characterized by a risk-on mentality when assets recovered their severely discounted prices after the financial crisis.

During the second phase, different sectors started to diverge; energy and bioscience companies took the lead in 2013 and 2014, only to retreat in 2015 as information technology shares caught investors’ fancy.

With the large-cap S&P 500 up more than 17% since Election Day last year, it’s not surprising that long-short investors are finding their long book is doing a lot better than their short bets. But the immediate question for many advisors is: Exactly how expensive are equities today?

As of early September, valuations stood at the 18th percentile of levels in the 27-year period since 1990, according to the model developed by Gotham Asset Management co-chief investment officer Joel Greenblatt. That period is significant to some investors because many think 1990 marked the real shift to an information economy from an industrial one. Like all models, Gotham’s isn’t perfect, but Greenblatt says that, on average, it’s right about two-thirds of the time.

Greenblatt will be joining Ali Motamed of Invenomic Capital Management and Jim Paulsen of the Leuthold Group for a general session at Financial Advisor’s Inside Alternatives conference on October 24 in Denver. Financial Advisor checked in with the three of them to get a preview of their thoughts.

Gotham’s valuation process ranks stocks on measures of both absolute and relative value, incorporating the firm’s proprietary assessment of a company’s operational cash flow. If the model confirms what everyone knows, namely that equities are pricey, the good news is that they are not as overvalued as some might think.

Greenblatt says it would take a 17% or 18% correction in the Standard & Poor’s 500 to move the index back to the 50th percentile. A correction of that magnitude would keep the bull market alive, but barely so, as it would remain just above the 20% decline that typically defines a bear market. As equities have climbed over the last year, valuations have remained right around the 17th or 18th percentile, meaning that operating cash flow has kept up with rising prices.

In the past when equities have stood at their current level, Greenblatt says the S&P 5000 has returned 4% to 6% during the next 12 months and 8% to 10% over the next two years. Pedestrian to be sure, but better than most bonds are likely to return.

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