“The future is now”

I have stolen a line from John Hussman’s most recent market commentary.  Like most who are focussed on valuation, Hussman is not concerned about how much stocks can rise or fall at any one point in time, but to what extent, or not, prices have discounted future earnings growth.  This is translated into an estimated total return that is likely available from stocks based on current valuations, expected future growth in earnings and an assumption regarding an appropriate valuation range. 

All decisions today are effectively based on an assumption about the future, so the future is always now, but when valuations are at extremes, inappropriately structured portfolios are exposed to the future.

There are three portfolio management mechanisms that need to be borne in mind as markets and risks peak and these are a) the return assumptions you use to project asset/liability modelling and management planning and decisions going forward, b) the extent to which your asset and liability management is impacted by the longer duration of short term economic and market risks to return and c) the extent to which you adjust asset allocation to take account of the longer duration of short term risk and the narrower margin of return on risky assets.

I do not believe that any of a, b or c are market timing exercises per se because our view is not now but the future – in other words the future is now.  I also believe that managing risks to return and the ability of assets to meet future and especially near term liabilities as markets peak to be a natural economic mechanism for managing consumption/production and savings/investment balances.    

The portfolio allocation should match the economic allocation!

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