Profit Growth

So US stocks were broadly up around 30% in 2019. As we’ve discussed before, valuations are a reflection of price relative to some fundamental metric such as earnings or cash flow.

I came across this chart today. I’ve seen variations of it in multiple places in recent weeks. It’s worth sharing simply because profit growth declined last year and stocks were still up 30% here in the US. This means that stocks got more expensive in 2019. In other words, the denominator in the value ratio shrank while the numerator (price) increased resulting in a higher valuation multiple/ratio.

Lots of people are talking about this already and issuing warnings or complaining because they missed out on the party last year. I’m not beating either of those drums. I think it’s important to understand this dynamic and to know where we are right now relative to history. It’s not time to panic. It’s time to be aware and to prepare yourself mentally and emotionally for what may lie ahead. If you have a plan and a well constructed portfolio then you should feel confident that you’re ready for whatever the future holds.