It’s time for our monthly look at market risk factors. Just as with the economy, there are several key factors that matter for the market, in determining both the risk level and the immediacy of the risk. Stocks have largely recovered from their recent pullback, but given valuations and recent market behavior, it will be useful to keep an eye on these factors.
Risk factor #1: Valuation levels
When it comes to assessing valuations, I find longer-term metrics, particularly the cyclically adjusted P/E ratio, which looks at average earnings over the past 10 years, to be the most useful.