There is no correlation between current valuations and returns over the next 12 months, according to Katie Nixon, chief investment officer of Northern Trust’s wealth management unit.
Nixon addressed this issue and others with Jeffrey Kleintop, chief global investment strategist at Charles Schwab & Co., at last week’s Investments & Wealth Institute’s Investment Advisor conference in New York City.
Students of the equity market believe valuations can be a useful tool to estimate long-term future returns. Moreover, many observers believe the stock market's outsized gains since 2009 will inevitably lead to lower returns at some point in the future as markets revert to the mean. But Nixon and Kleintop maintained that day of reckoning might not come in 2018.
Instead, both market observers were optimistic about risk assets like equities in the U.S. and other markets.
Tax reform in America “adds fuel to an already burning fire,” Nixon said. In Europe, the story is somewhat different, but equally positive, as corporations there are seeing major profit margin expansion.
Kleintop noted 2018 was the first year in memory where back-to-back growth in the world’s 45 largest economy was likely. Recovery in the global economy has been weak since the great recession and some other leading countries have experienced mild recessions since 2009. Japan, the world’s third largest economy, has experienced two downturns.
In 2018, global stocks returned 22 percent, Kleintop said. When world equity markets have performed at that level in the past, returns over the next 12 months have averaged 18 percent, he added.
In the U.S., equities have experienced a year, actually 14 months, without a single negative month. “That’s never happened before,” Kleintop said.
While U.S. valuations are lofty and could suffer a correction, emerging markets still have room to move higher, Nixon declared.
Ironic as it may sound, the biggest thing to fear may be the overwhelming positive outlook approaching euphoria. “No negative sentiment makes markets more vulnerable,” Kleintop acknowledged.