The immediately-practical conclusions, however, are straightforward. If you will spot me that it is appropriate to assess valuation within a regime, rather than over the longer sweep of history, then equities appear to be fully but not excessively valued. Accordingly, they are likely to outperform slightly in the modal forecast of continued growth and no severe deterioration on the trade war front. However, unlike earlier in the economic expansion and bull market, valuation offers little insulation against negative policy shocks or a possible downside miss relative to the central-case economic growth outlook.
It may seem odd to describe equities as only roughly fair — or indistinguishable from unfair — after a quadrupling of the real return. But at the beginning of this bull market, equities were extremely cheap. And some analysts, including particularly followers of Shiller and related approaches, were early to identify an exhaustion of value. I elaborate a bit on that latter issue along the way to explaining my own metrics here.