Dealing with a Runaway Market

Those of you who have been following us since 2010 will identify us a perma-bulls. Even in the depths of the ECRI 2012 /Hussman recession calls we were firmly bullish on the US economy and stock market – quite contrary to the popular consensus at the time. Those subscribers who have been diligently following the RAVI SP500 forecasting model and its consistently accurate bullish forecasts will have noticed this year that all the targets we have set for 3Q2018 have been met on our Dashboard:


This means, for the first time since we have been running this model, that RAVI SP500 valuations have finally run ahead of themselves. This is not to say this exuberance will not continue for some time, but it is a warning for those who like to deploy valuation risk metrics in their asset allocation models.

Now for a long time, various valuation models have been at elevated levels. Here are a few below:

Despite these elevated levels, RAVI was forecasting bullish returns for 2016 and 2017. All these models above have very good correlations to 10-14 year ahead SP500 returns and in many instances of late were actually forecasting muted to negative 10-year ahead returns. But just because a valuation model is forecasting a negative 10-year return doesn’t mean that 1-3 year returns will be poor! This mistake is consistently made by forecasters! A case in point is shown below, using Warren Buffets famous valuation metric. Since 2014 this model has been persistently forecasting low to negative 10-year ahead returns – but that didn’t stop the SP500 roaring ahead!