Mean Reversion + Valuation = Opportunity

Gradient used.

  • U.S. equities are near their highest levels in history, based on valuation metrics. This suggests meager returns of 4-5% per year over the next decade.
  • However, based on reversion to the mean and attractive valuations, there are several attractive asset classes.
  • U.S. value, international, emerging markets, natural resources, MLPs and gold present opportunities.
  • These assets have the potential for returns in a Base Case scenario ranging from 5.5% per year to 11.6% per year.
  • History has shown that it can take years or even decades for a reversal. Only patient and bold investors may reap the rewards.

Current U.S. equity market valuations will make it hard for many investors to achieve their goals in the coming decade. Current valuations imply long term returns of only 4-5% per year. However, an analysis of historical return data and valuations suggests attractive opportunities in select asset classes. These include U.S. value, international developed, international value and small cap, emerging markets, emerging value and emerging small cap. Natural resources, MLPs and gold are also enticing. Investors can utilize these assets selectively to boost portfolio performance or as core components of a contrarian portfolio. However, there are important caveats that investors need to consider.

See the full article at Seeking Alpha.