O’Shaughnessy: History Tells Us Now Is The Time to Buy

Jim O’Shaughnessy, Chairman and CEO of O’Shaughnessy Asset Management, believes that equity valuations “present buying opportunities akin to 1974 and 1982.” He writes that investors need to ignore short-term volatility and market-bottom calling, and instead focus on where stocks will be three to five years from now.

O’Shaughnessy offers a number of historical stats that put the recent decline, volatility and opportunity in context. One is that “there have only been 66 days that the Dow closed +/- 6% (total return) from the previous close. Eight of those days (12%) have come since September 29th of this year.” Second, according to “JP Morgan, the value of short-term cash holdings in the U.S. now exceeds the market cap of the S&P 500”. Third, the yield on short-term Treasuries recently went negative as investors flocked to less-risky assets.

But the “the pervasive fear and uncertainty have left stocks extremely cheap for the long-term investor” says O’Shaughnessy. He says that 153 stocks in the S&P 500 are now trading below book value, that the normalized P/E ratio for the S&P hit 10.4 on Nov. 20th (this level was among the 10% of the lowest observations in 52 years), and that long-term mean reversion would indicate that now is an excellent time to be a long-term equity investor.

Leveraging his knowledge on systematic long-term investing and stock market history, O’Shaughnessy shows that by selecting stocks using specific fundamental variables (low P/S, high buyback yield, and strong momentum), specific investment strategies can outperform the overall market coming off bear market and recessionary environments. He writes, “in the five-year period following recessions, the cheapest decile of stocks in our All Stocks universe outperforms the most expensive decile by an average of 13.96% annually!”