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The markets for Tuesday, viewed before opening, look like they're going to be choppy and erratic, as investors continue grappling with last Thursday's rout. Only time will tell if the plunge was a hint of what is to come, or whether it was, iin the words of some analysts, 'a speed bump' on the road to higher valuations.
Apart whether last Thursday's bloodshed, actually presages a correction, one is certainly possible, according to Jay Nash, Senior Vice President and Portfolio Manager at National Bank Financial in London. The signs of a possible correction include a shift in some investors' behavior from fear to greed and a focus by some on short-term gains instead of the real risk being taken.
Valuations have become extended. The forward Price/Earnings multiple on the S&P 500 is around 23 times while the 30-year average is 16.5 times. That, says Nash, suggests that the S&P 500 is expensive and future expectations should be adjusted downwards. This does not mean that the current rally will definitely end on any specific date but does mean that we need to recognize that earnings have to catch up with valuations. In turn that likely means lower returns in the short-term. We also need to recognize the likelihood of more days like last Thursday.
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Buckle up.