‘Dangerous’ Pair of Valuation, Correlation Threatening Stocks
- Leuthold’s Paulsen warns of risk to stocks from combination
- History shows declines when valuation high, correlation low
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The current stock market environment of low correlations combined with high price-earnings ratios has historically suggested significant downside risk for U.S. shares, according to The Leuthold Group.
Since 1952, when P/E ratios were in their highest quintile at the same time correlations were in their lowest, future one-month S&P 500 Index annualized returns were a negative 9.5 percent, Jim Paulsen, Leuthold’s chief investment strategist, wrote in a note to clients Monday. That compared with a 26.5 percent positive return when valuations were in their lowest quintile and correlations, a measure of the degree to which individual equities move in tandem, were in their highest, he said.