The Bubble Has Not Popped

Topics - Equities Strategic Asset Allocation Asset Allocation

${ numberSection } ${ text }
The Bubble Has Not Popped

AQR Working Paper

There are currently a legion of investors, strategists and general pundits telling us that the stock market is “undervalued.” While some have formal models for this, the most common observation is simply that stocks have dropped dramatically. Darn it, smart brave investors buy when things are lousy. We have fallen so far, it has to be time for the “bottom,” and when we hit the “bottom,” it’s straight back to Nasdaq 5000. Right? Well, not so fast.

The fact that stocks could have fallen so much and still be so expensive, is a statement about how silly we all got in 1999–2000 and about the disingenuousness of those who didn’t sound the alarm back then. It is not a statement that stocks are cheap at the time this paper was written, in 2001. In fact, the opposite is true.

Basically, stocks are massively expensive versus all of recorded history on any reasonable scale. They are down from their provably insane levels of March 2000 (and please quote me here, any strategists not saying boldly that they were stupidly expensive back in March of 2000 should have their math and/or motivations checked), but stocks are anything but cheap today.

This document is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management, LLC (“AQR”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is not to be reproduced or redistributed to any other person. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Past performance is not a guarantee of future performance. Diversification does not eliminate the risk of experiencing investment losses. 

This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein. 

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.

The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.