Is the market over-valued?

Ron Phillips //May 22, 2013//

Is the market over-valued?

Ron Phillips //May 22, 2013//

Is the market over-valued?

There are thousands of opinions on this. Most fall under two camps: bullish or bearish. Some of the more famous bears, like Robert Schiller, with his Schiller PE Ratio, would say that this market is over-valued. The optimists would say we are beneath historic valuations, and the market is fairly valued.

I fall under the cautiously optimistic side. What I saw in the last 13 years was bubble after bubble. We had the tech bubble, housing bubble, commodity bubble and a precious metals bubble. And now, arguably, we’re in a government debt bubble. Despite these excesses, I think we’re winding down to a fairly-priced market.

VALUING THE MARKETS

The most common way to value markets is to compare prices to profit. This is the well-known P/E ratio. The lower the number the cheaper the asset.

As of this writing, the Standard & Poor 500 was priced at 1,519. According to S&P’s website, the P/E for 2013 is estimated to be 13.65. The estimate for 2014 is just over twelve. It’s getting lower because these companies are expected to earn more each year.

Compare these low estimates with the historic P/E ratio of 15.6 and we can see that the broad market may be cheap.

WHAT’S A SECULAR MARKET?

While no one can predict the future, we can look at trends. Since the early part of the 20th century, the stock market has had “secular” bear and bull markets. This means that there are very long-term highs and lows. For example, 1980 to 2000 was a widely accepted, secular bull market. It kept climbing to new highs and generating new wealth. Why is all of this important?

Because, while we might be in a reasonably-priced market, we might not see new high after new high (new wealth creation) being achieved by stocks soon. It could take a few more years to enter into another secular bull market.

TIME TO INVEST?

I wrote an article in May 2009 mentioning the SPDR Dow Jones Fund (symbol: DIA), which mimics that index. At that time, it was priced at $82.78. Then in June, 2010 I wrote again mentioning the fund. The latest price for the SPDR fund is $139.45. Either entry point would have produced a significant profit plus a healthy dividend income.

[You can read these articles by ordering a free copy of my second book. Just mention The Armchair Investment Reader, using the contact info below].

If markets are reasonably priced, you might want to do something about it. We can’t time the market perfectly but you don’t want to miss out on those magical, secular up markets.