11/20/2013 11:45 PM ET|
3 reasons the market isn't overvalued
We're overdue for a correction. But for investors with a long-term view, share prices, while hardly in bargain territory, are still reasonable.
If opinions about the direction of stocks didn't differ, there wouldn't be a market. But as market indexes continue to climb to record highs, the dichotomy seems greater than usual. Is the stock market a bubble or a bargain?
As usual on Wall Street, the answer depends on a number of variables, the most important of which is your investing time frame. For investors with a long-term view, share prices, while hardly in bargain territory, are reasonable. Stocks may not be as cheap as they once were, but they are not yet overvalued, let alone in bubble territory. Here's why:
1. Price-to-earnings ratios aren't overblown.
No argument, investors have bid up the amount they're willing to pay for each share of corporate earnings. A year ago, the Standard & Poor's 500 Index ($INX) commanded a price that was just over 13 times the average estimated per-share earnings of its constituents for the year ahead. Now, the S&P trades at 15 times estimated 2014 profits. But that's just about the average, going back 30 years, and it's less than the average of 16.5 of the past 15 years. Since 1996, P/Es have ranged from 10.5 to more than 25.
Given accelerating economic growth, low inflation, rock-solid corporate balance sheets and improving sentiment among stock investors, the current average P/E is reasonable, say the bulls. It could even go higher. It's only normal that we would have a period of expansion after earnings multiples compressed throughout the first decade of this century. A P/E of 18, however, should give you pause; 20 would be a waving red flag.
2. The bull market isn't as old as it looks.
Stock prices bottomed on March 9, 2009, in the aftermath of the financial crisis. From that day through Nov. 12, stocks soared 161 percent (189 percent, including dividends).
In terms of both longevity -- the advance is approaching its fifth anniversary -- and the rise in stock prices, this bull market is above average. But what if you were to date the bottom of the market a different way -- not based on when prices hit their lows, but when other market yardsticks did, such as price-earnings ratios or price-to-book-value (assets minus liabilities) ratios?
Using those yardsticks, says market strategist Jeffrey Saut, of Raymond James Wealth Management, the market didn't reach bottom until November 2011. That would make the bull just two years old. There is precedent for Saut's market-dating mechanism. Recall the period from 1966 to 1982, when the market traded in a relatively narrow range. The low in prices came in 1974, but the valuation low didn't arrive until August 1982 -- and that marked the beginning of a five-year bull market.
3. Overvaluation is relative.
Parts of the market do indeed qualify as overpriced, while others are still reasonably priced. Shares of companies that cater to consumers -- both those that sell the stuff we use every day (from soap to soda) and those that sell non-necessities (think retailers and restaurants) -- are expensive. So are the stocks of utilities and the like that serve as high-yielding bond surrogates, which have attracted investors in droves since the financial crisis ended.
"I'm staying away from defensive stocks and pure yield -- consumer staples, telecom and utilities," says Mike Wilson, chief investment officer at Morgan Stanley Wealth Management. "You won't lose your shirt, but they're expensive if you believe interest rates will grind higher."
You'll find better values in health care, as well as in stocks that swing with the economy, such as energy, manufacturing, industrial and technology companies. Large-company stocks are better deals than stretched small-company shares; choose shares of globally diversified companies over U.S.-focused firms. Globally diversified firms, which normally command higher P/Es than their U.S.-focused counterparts, are selling at their lowest valuations in a decade, according to BofA Merrill Lynch Global Research.
But if your time horizon is short, watch out.
We're overdue for a correction. The last breather that the bull took ended in October 2011, and stock prices are up some 60 percent since then. If history is a guide, it looks like the market will sail through the December holidays on a high note, says Sam Stovall, the chief market strategist at Standard & Poor's. The market's fundamental underpinnings are strong. The economy is expanding, inflation is low and corporate earnings are growing.
But there are some signs of froth in share prices. Chief among them is the recent, rapid acceleration of money flowing into stock mutual funds and exchange-traded funds. In October, those funds took in $53 billion more than came out, according to market research firm TrimTabs. That's the fourth-highest monthly net inflow on record.
The market for initial stock offerings is also heating up, paced by the much-ballyhooed debut of Twitter (TWTR), which soared nearly 75 percent its first day out of the gate. Investor sentiment, often a contrarian indicator, is increasingly bullish, with 46 percent of investors polled by the American Association of Individual Investors in the bullish camp, compared with a long-term average of 39 percent.
Those may be signs that the bull market has gotten a little ahead of itself. A pullback (losses of 5 to 10 percent) or a correction (up to 20 percent) would not be surprising. But longer-term, this bull has room to run.
More from Kiplinger's:
VIDEO ON MSN MONEY
Really? 89 billion injection a month,
By mid 2014 you better have an extra pair of sox and shoes, they are going to be knocked off when things bottom out. History repeats itself.
P-E ratios ARE overblown.
The bull market is getting OLDER every day.
Yes, overvaluation is relative, but that's a weapon that points BOTH ways.
And then at the end of the article, the author says we're OVERDUE for a CORRECTION.
So which is it?
Bull market or Bear market??
Considering the state of the economy [which BITES for at least 75% of the people in this country], considering the FACT that federal government is LYING AND UNDERSTATING the RATE of inflation, and considering the fact that wall street is ONLY going up because of PUMPING counterfeit money into it, I'd say WATCH OUT!!!!
Take your money and RUN!!! Get out of the market now!!!
You tell retired granddaddy, V_L_!!!!!
Yup, he's just like All socialists, MORE government spending, MORE taxes, MORE borrowing, etc.
And the statement that the poor can't get any worse?? FUNNIEST and STUPIDEST thing I've heard in years
This notion of PE ratios and value has to be completely thrown out the window. Massive stock buybacks across the Board via Crack-Dollars has given the illusion of reasonable PE ratios. The Biggest Buyer of Stocks, the Companies themselves. The Biggest push behind that, the Global FEDS printing to infinity.
The Bull Market is actually a lot older than it looks. No fuzzy math will ever change that.
If enough investors feels a PE of 1 is too much than it is. It really doesn't matter what the fuzzy math states. If enough speculators feel that a PE doesn't matter, if won't, again, it won't matter what the fuzzy math states.
I don't necessarily buy into the NOTION that we are ever overdue for a Correction per se no more than we are ever due for a massive rise in a given time-frame. If that's the case and logic, then we are way overdue for a bear market that lasts well over a decade.
I also don't buy into the Notion of Time being on your side for longer term investors. Things are getting progressively Worse not better and Stock Markets will never warn you about that. The longer this Crack-Dollar Fed keeps playing it's game, the Bigger the long-term risk to the Markets. Companies have become notorious for not planning for the long-term. Their biggest focus, paying out as much as possible to top crooked executives and shareholders part of the 1% crowd. They tell you to buy in while they are selling out by the truckloads.
And then the average Joe bets the farm only to get bent over good. The rich will sell out high and wait for the sky to fall in then buy in again so they can wait to sell high again. If you can't play this game under these rules just enjoy life as is. In the end you will live longer.
The market isn't overvalued because of one thing and one thing ONLY......
Obama has so weakened the Dollar with his Fed Diluting the value of the Dollar to the point of the rest of the world NOT wanting to buy our bonds anymore, which in turn causes more "printing" which causes less demand for dollars and on and on the cycle goes until we have a failed Bond auction just one time, then the bottom falls out of our economy and we enter a deeper Depression than we have EVER experienced before.
Think not, Google "China international currency agreements"
They have already positioned themselves to get away from the dollar and trade worldwide without using the dollar, as is the EU and most of the rest of the world. When the announcement is made that the dollar will no longer be the Worlds reserve currency, look out below, we will CRASH, BIG TIME.
And regardless of who is in the white house at the time, THIS IS OBAMA'S LEGACY all done to try to look competent during his time in office, and to hell with the nation once he is out.
SHEEPLE just do NOT get it.
The stock market goes up long term; it NEVER fails... Always be accumulating systematically.
Keep diversified. Have reserves for opportunities.
Don't try to guess the market, you will always lose.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The stock market began the new trading week on the defensive note with small-cap stocks pacing the retreat. The Russell 2000 (-1.4%) and Nasdaq Composite (-1.1%) displayed relative weakness, while the S&P 500 lost 0.8% with all ten sectors ending in the red.
Global equities began showing some cracks overnight after China's Finance Minister Lou Jiwei poured cold water on hopes for new stimulus measures. Specifically, Mr. Lou said the government has no plans to change ... More
More Market News
|There’s a problem getting this information right now. Please try again later.|
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'