Risk-return trade-off gets tricky for U.S. equities

November 27, 2017

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Joe Davis

Joe Davis
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Are we seeing a bubble along the lines of the late 1990s, when U.S. equity valuations reached all-time highs and prices subsequently plunged by 50%? Vanguard researchers looked at the question. Traditional valuation metrics, such as CAPE (cyclically adjusted price-earnings), paint an alarming, but incomplete, picture when compared with their long-term averages. Vanguard’s "fair-value" CAPE suggests that U.S. stocks, while trading above fair value, aren’t yet near the dot-com era’s extremes. Even so, our five-year outlook is subdued at best, and the case for global diversification is compelling.

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