Bubbles are the only things that matter. The rest of it is boring. You show up for work, markets are at normal levels, and there’s not much you can do. It’s all trivial. But in a great bubble you can get your clients’ arses out of the way, and the money you can save can be quite legendary.” – Jeremy Grantham

The financial services industry generally frowns upon market prognosticators. “Stay the course,” they say. This is especially true in recent years since passive investments have outperformed active ones. Admittedly, peering into one’s financial crystal ball and voicing an opinion can be a risky endeavor. Besides the obvious risk of being wrong, another risk is being labeled a perma-bull or perma-bear. In article after article that I read, the media loves to turn to its favorite go-to bulls and go-to bears for an appropriate quote. Unfortunately, few individuals are permitted to change their minds and even fewer do it well.

At Runnymede, we do a lot of research, and our view is dynamic, not fixed. Ultimately, our market outlook is reflected in the positioning of our clients’ portfolios. Contrary to our views expressed in July 2015 (Financial weather: Central bankers creating clear skies), our outlook has changed markedly. Here’s a quick recap.

Valuation

On August 12, 2015, Runnymede sounded off the first alarm for the possibility of a major financial hurricane.

We wrote:

“When looking at the financial weather, Runnymede uses a multi-factor model to track where we are in the market cycle. One of the key components is valuation. Two of the most famous valuation models are Warren Buffett’s total market capitalization to GDP and Nobel laureate Robert Shiller’s CAPE (cyclically adjusted PE) ratio. If you look at either of these measures, the market is overvalued.”

“Looking at these two valuation models together, the market certainly looks overvalued in relation to history. The next 10 years will likely be a challenging environment for investors and it isn’t going to be an easy road to navigate. It most certainly won’t be a good environment for those who choose to set it and forget it. There are times to be aggressive and times to be defensive. Simply using valuation metrics, this is a time to be defensive.”