Making friends with fear

Make friends with fear now. This is the advice of Roger Montgomery of Montgomery Investment Management, who says that some of the most sensible advice a long-term investor can receive is related to one’s temperament. He says in more than three decades of investing, he has rarely seen sentiment so glum. This is perhaps best reflected in the Price-to-Earnings (PE) ratio for S&P600 small-cap index. Roger says data compiled by Ed Yardeni shows that the PE ratio for U.S. small caps is as low as during the Global Financial Crisis and even lower than it was during the outbreak of the Covid-19 pandemic. He says over the last quarter of a century, the 12-month forward PE ratio hasn’t explored levels meaningfully lower than where it is today. Roger says PE ratios are the pulse of sentiment and sentiment is now on its knees thanks to fear and maybe it is time for investors to be greedy. He says the zero-interest-rate epoch is now over, as is the period of ever-expanding market valuations. Four decade-high inflation and a bond market pricing in further rate rises have resulted in investors abandoning so-called growth stocks. But given where PE ratios are today, Roger says there’s a much-better-than-even possibility investors who purchase shares in high-quality growth companies today, will not only benefit from the earnings growth produced by their selections but also the re-rating, at some point in the future, of PE ratios to higher levels.