In case you’re waiting for some asset or thing to fall in price simply because it appears “expensive”, or you’ve purchased something only because it’s perceived to be cheap and “under-valued”, good luck with that. Wall Street strategists have known for quite some time, maybe forever, that price, in and of itself, is not a catalyst to drive an asset’s value going forward. Ultimately, it will be something else that causes the movement in an asset’s price and, therefore, its valuation. Catalysts describe new information or events that are material enough to change investor sentiment which results in driving either the attractiveness or un-attractiveness of holding onto or dumping an asset. In order to change investor behavior a proper catalyst will always be required.   

We have all witnessed wild price fluctuations over the years, especially in the world of commodities, prices can make very wild swings. I remember back, I believe the year was 1996, when the price of a barrel of oil fell to around $5-$6 a barrel, and there was considerable chatter about whether that was maybe a misprint? Fast forward to a little more than a decade later and oil was trading for $147/barrel. That’s a price climb of almost 2,500 percent! But again, the catalyst for the price ascension of a barrel of oil was never it’s price. Since we have auction markets in this country, an asset’s price is simply a reflection of what the last buyer and seller agreed upon, that’s about it. Not much more information to be had there, each participant had their own reason as to why they decided to buy or sell, and those reasons can be almost endless. U.S. financial markets are like that, they are nothing but a ginormous brokered public auction where the last price posted reflects only the last few transactions, so I wouldn’t assign too much weight to it.

There is a reason though that market strategists (usually) do include valuation in their argument either for the purchase or sell of an asset such as company stock, commodities, real estate, etc. The reason is that valuation is a good predictor of future price action. If a stock or commodity has had record gains for an extended period of time, it can mean that gains going forward for that particular asset (issue, class or category) could be somewhat muted and thus investor expectations should be lowered or adjusted in a particular case. And conversely, the opposite case can hold true for an asset that has underperformed for an extended period of time. In this case, strategists may cite a “catch-up” phase for that particular asset which can result in an asset being more attractive to hold going forward. Therefore, strategists will tend to cite “valuation” as part of their recommendations because it usually does play out that way over time… be aware though that effective catalysts usually don’t come in a box by the dozen! 🙂