Valuations matter, but markets can ignore them for long stretches of time. The chart below from The Leuthold Group equates today’s valuation profile to that of August 1997, ahead of a 70% run-up into March 2000.
This is not a forecast, Leuthold exclaims!
But let’s keep an open mind to what the market may or may not do following the classic breakout of July 2016. According to our working hypothesis, the market logged a 4-year-cycle bottom in January 2016. Thus an ideal top is not due until mid-to-late 2018.
There’s no telling how high the market might go if the rally has another year-and-a-half to run. While valuation is a clear headwind, let’s not rule out a melt-up scenario. Paraphrasing Yogi Berra: The party ain’t over till nobody’s sober.