David M. Blitzer is managing director and chairman of the S&P Dow Jones Index Committee. He has the overall responsibility for index security selection as well as index analysis and management. A graduate of Cornell University with a B.S. in engineering, Dr. Blitzer received his M.A. in economics from the George Washington University and his Ph.D. in economics from Columbia University.
Wall Street is always coming up with cunning new marketing techniques to attract tourist investors. These are less-sophisticated individual investors and advisers who are easily wowed by glitzy industry trends, only to abandon them when the strategy falls short of expectations. The latest spin to attract tourist money is “smart beta.” The phrase didn’t exist one year ago, yet a Google search today shows 190,000 results. The inference that investing this way is smart has ignited a strong interest among less-sophisticated investors while those who truly understand what’s behind these strategies find the phrase distasteful at best.
Some people say today’s price-to-earnings ratio (P/E) is a sign of overvaluation. Others say it’s a sign of improved earnings growth in the future. In my view, it’s neither. The current valuation of the stock markets doesn’t tell us anything about the future of corporate earnings.
The real yield on Treasury bonds has fluctuated wildly since 2005. The inflation-adjusted yield on the 5-year T-note roamed from 1.1% in 2005 to 2.7% in 2007, down to zero in early 2008, up to 4.3% in late 2008, down to -1.7% in 2012 and today it sits at 0.1%. What is the real yield [...]
I am often asked how market valuation plays into asset allocation decisions. Should an investor consider reducing equity exposure when the market is trading at a high price relative to earnings? My standard answer is no, but in some situations, yes.