Market Valuations: Is it Time to Rebalance Again?

By Dean Barber

July 2, 2021

Market Valuations: Is it Time to Rebalance Again?

Key Points – Market Valuations: Is it Time to Rebalance Again?:

  • Market Valuations & CAPE Ratios
  • June Market Performance
  • It May Be Time to Consider Rebalancing
  • 3 minute read | 6 minutes to watch

Stick around for the next few minutes as I walk through market valuations, expected long-term returns based on current market valuations, and where we are right now in the economic cycle, where the markets are, and what we think is ahead.

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Market Valuations: Is it Time to Rebalance Again?

Alright, let’s get started with market valuations. We’ve been through this the last couple of months, and you’ve probably heard me talk about market valuations on America’s Wealth Management Show.

I want to show you a chart showing the CAPE ratio, which is the cyclically adjusted price-to-earnings ratio. So we’re going to look at that from a historical perspective first, and then we’re going to take a look at what long-term average returns are when CAPE ratios are at the level that they are today. 

Market Valuations & CAPE Ratios

Market Valuations - SP500 Real Price Valuations

Figure 1 | Source:

So, first of all, as you can see in Figure 1, our CAPE ratio is the orange line and is nearing 37. The only time in history that it’s been higher is during the Dot Com Bubble era. If you all remember, during bubble era, when the market started falling, we were able to go forward for a total of 13 years before the markets fully recovered, where they were at the peak of the market in the Dot Com Bubble. Now, we know valuations can go higher than they are today. And just because we have high valuations doesn’t mean an imminent bear market is at hand. 

It does mean, though, it’s time to step back and look at where you are overall. Here’s why. 

Market Valuations - 10 Year Total Returns

Figure 2 | Source:

If we look at Figure 2, it shows ten-year total returns. Now, this is total return, not an average annual return. When you have CAPE ratios over 35, look at these ten-year total returns, anywhere from a negative 5% to a positive what 4% on the high side total return over ten years. That’s not acceptable. 

So we have to be smart about where we are today. We may need to be more dynamic and go back to some actively managed funds that seek out value in companies. Maybe we try to find the companies whose stock prices are not as overvalued as the market itself. There will be areas that we’re going to want to avoid. 

June Market Performance

Most of you recall that we laid into the portfolio more small and mid cap stocks back in January. So I want to talk to you about what’s going on in the market overall. 

Figure 3 | Source: Chaikin Analytics

So if we look at the market overall, just in the last month, you have the NASDAQ coming back up 6.31% for June, followed by the S&P 100 up 2.8%, the S&P 500 gaining 1.82%, the Russell 2000 small caps up 1.7% and the S&P 400 mid cap down -1.37%. So pretty significant divergence from a positive 6.31% to a -1.37%. 

Figure 4 | Source: Chaikin Analytics

If we look at it on a year-to-date basis in Figure 4, we change the scope. Look at what’s down towards the bottom, the NASDAQ at 13.15%. And remember, it made over 6% just right here in June. The S&P 600 small cap is the clear winner year-to-date, up 22.42%. Mid caps and Russell 2000 all up almost 17%. The S&P 500, up about 14.5%. These would be great returns for 12 months. Chances are, your portfolios have gotten a little bit heavy into equities. 

It May Be Time to Consider Rebalancing

During your next review with your financial advisor, take a look at that portfolio. If you want to discuss it before that, you’re always welcome to give us a call at (913) 393-1000 or visit us here to schedule a conversation. We can talk about where your portfolio is overall. 

The thing is that this would be a time where you may want to consider doing some rebalancing, taking a little bit of the winnings off the table, setting it over into a safer spot. We did a piece on bonds here last month. I encourage you to go back and watch that again. 

There are all kinds of headlines on inflation out there right now. We’re working on an article that we expect to have out to you within the next couple of weeks on inflation and commodity prices. So be on the lookout for that; we dive into a great deal of detail on what we see happening on the inflation front. 

So with that, I want to encourage you to keep us informed on where you are as far as your risk tolerance, spending goals, etc.

We know we do that with you regularly when we sit down and review your financial plan, but stay in constant contact with us. Let us know if you’ve got questions or concerns. We’re always here to help. Thanks so much for joining me today. 

Dean Barber Founder & CEO

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.