The three signals investors should get 'cautious' on the market

Three different measures of valuation are leading one portfolio manager to approach the market with a cautious tone.

"We're concluding that we're in a low-return environment and investors should be cautious," on equities at this juncture, said Chad Morganlander, a portfolio manager at Washington Crossing Advisors.

He considered three measures of valuation that leads him to a more prudent approach right now, he said Tuesday on CNBC's "Trading Nation." First, he believes the forward price-earnings multiple on the S&P 500, which is currently nearly 18 times forward earnings, is historically stretched.

Indeed, the forward price-earnings ratio of the S&P 500 for the next 12 months is hovering near its highest level since early 2004, according to FactSet data.

Next, Morganlander said the market cap of the S&P 500 relative to the U.S. nominal gross domestic product is historically high, too. It appears similarly for the Russell 2000, as well as the Wilshire 5000 index, too, he said.

Finally, the S&P 500 market cap relative to the market's broader enterprise value-to-sales ratio is also historically extended, he said, which gives him pause about the market's rise at this point.

When rates are low around the world (Morganlander cited the 10-year Treasury note yield, which is historically low at 2.2 percent) investors have "nowhere to go except into more speculative asset classes" such as stocks.

However, investors ought to be cautious when it comes to this measure, as earnings are "highly volatile on the S&P 500 and you can have a time, in recessions, that earnings dip."

If someone is a growth investor, Morganlander said, it may be prudent to be "balanced," and allocating half of their assets in equities and half in bonds (which are traditionally considered safer investments).



Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more