For the past decade, it seems all roads across the Global capital markets have led to America. And in all fairness, this has been entirely the right path to travel, at least when it comes to investment returns.
After staring into the abyss in 2008/09, a great reset in valuations across US asset classes set the scene for great opportunity to come from great crisis.
In hindsight, A few other things went very well for America throughout this period. There was massive and prolonged monetary stimulus from the Federal Reserve (along with fiscal stimulus in the early stages of the economic recovery), capital flight from Europe as it dealt with rolling crises, and there was also a literal and metaphorical striking of oil (the shale oil boom, and striking tech stock oil with the rise and global dominance of the US Big Tech oligopoly).
This was only further extended in the wake of the pandemic, punctuated by a brief dip, and powered up by stimulus checks, global monetary easing (again; with much of global capital finding its way to America), and subsequent rounds of fiscal stimulus (including the Biden era economic policies).
It’s important to understand this history and the path we took to get here, but the bigger story is what may come next.
While it’s impossible to know the path that the economic policy and geopolitics will take in the coming decade, it is by contrast easy to know the valuation picture and what this means for forward-looking probabilities. This is shown in the chart below.
The chart, which was featured in our Q1 Strategy Pack (and in the 10 Charts to Watch in 2025), shows the average valuation score across US Equities (our S&P 500 valuation indicator), US High Yield Credit (credit spreads inverted), the US Dollar (our DXY valuation indicator), Property (US housing market valuation indicators), and Treasuries the exception are shown inverted because the time when people want to own treasuries is usually the opposite to the time when people want to own stocks.
The extremely cheap asset market valuations of March 2009 set the scene for the glory of the past decade and a half, and as I noted a lot went right to help things along from there. The extremely expensive asset market valuations of December 2024 by contrast set an all-time high and surpassed both the dot com bubble and the pre-financial crisis housing bubble heights. Regardless of what goes right or wrong in the coming years on the macro front, US assets right now are priced for exceptional. This is your prompt to pause and think.
Key point: US Asset market Valuations have reached Exceptional heights.
Bonus Chart: The What/Why/How of Valuations.
I thought it would be worth resurfacing this chart from the series of educational articles I wrote earlier last year on valuations for multi-asset investors — and how to use valuation signals to navigate the market cycle.
The basic concept is that valuation signals when they reach an extreme have powerful contrarian information; they tell us about forward-looking risk and opportunity set using current information. Through-the-range however they present momentum information.
Applying this to the above chart we can understand the journey from extreme cheap in 2009 —at the time a very contrarian outlook of high upside probability (high opportunity), all the way through to now (I would say an equally contrarian outlook); high downside probability (high risk).
And there’s a key point: these are not certainties, this is about probabilities. When you deploy capital at cheap valuations you have probability on your side. When you deploy capital at expensive valuations it rests much more on faith, hope, momentum, and the existence of people willing and able to buy from you at even higher valuations.
I’m simple, I like it when I can look at the data and go where the probabilities are in my favor. It makes me uncomfortable to invest later in the cycle, even if in hindsight that’s the right move. And in the end we all have to make up our own mind on what kind of strategy and process we are going to run with — both on its own objective merits and how it fits our temperament.