O’Shaughnessy Quarterly Investor Letter Q4 2018

O’Shaughnessy Asset Management

Research

16 Pages

O’Shaughnessy Asset Management breaks down 2018’s market drawdown, arguing that falling equity prices were driven more by valuation compression than fundamentals, while assessing what that means for forward returns. Despite markets becoming cheaper, the paper suggests long-term returns may be structurally lower, challenging optimistic expectations.

Key Takeaways

Multiple Compression Dominated: Equity declines in 2018 were primarily driven by valuation contraction, with multiples falling sharply despite relatively stable underlying fundamental growth across many companies.
Lower Return Outlook: Valuation and trend indicators imply muted forward returns over the next 10+ years, with expected equity returns likely below historical averages following the late-2018 repricing.
Factor Drawdowns Severe: Quantitative factors experienced sharp reversals in 2018, with many strategies seeing double-digit underperformance during the late-year selloff compared to earlier stability.
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