Stock Market Overpriced?

[thechoson]

I keep hearing that the overall P/E ratio for domestic stocks is still too high.

Sorry if this sounds like a dumb question, still learning, haha.

In that case, would it be smart to start investing these days? Many people seem to think the stock market still hasn't recovered from the run up of the late 90s.

I'd personally think despite this fact, dollar cost averaging over a period of time in some index funds, being well diversified with some international stocks in the mix, and holding for the long haul would allow stocks to correct if they are indeed overpriced and still allow nice returns.

Of course, I could be talking out of my ass?

 

[Mr._johngalt]

No, on the contrary, I think your questions and observations are
quite "asstute". In any case, we are pretty relaxed
here. No rules about trying to communicate
using whatever orifice happens to be available.
Hey, a site with rabbits wearing pancakes
and a woman married to a guy who looks like
a big fish would allow just about anything

JG

 

[haha]

John, you are really hitting your stride. This is one case where I am really LOL!

Mikey

 

[Berkshire_Bull]

The stock market is not overpriced. It is not crazy to assume you can get an 8% capital gains increases with a 2- 2.5% dividend yield into the future. I see these companies coming out with record earnings every day, and yet the stocks don't move. They hike their dividends and noone cares. The market is appropriatelly valued. Not overvalued, and I wouldn't say undervalued either.

 

[cute fuzzy bunny]

Sorry but I disagree. I havent seen a single measure of broad market valuation that doesnt have todays prices, even after the drops we've had, being anywhere near a fair valuation.

The very nearest measurement I've seen presumes corporations will continue the recent record earnings for at least another 5 years. Havent seen any evidence or anyone, including most CEO's, who think that will happen.

Considering historic fair value for the s&p500 would be between 850 and 950, and we're a couple of hundred points above that...

Of course, anyone can measure the markets any way they wish and come up with different numbers. Considering we're well above the 'mean', pe/10 is high, pe vs historical pe levels is astronomical, I cant see making any kind of case for the market today being 'fairly valued'. Unless of course you think its all different now, or can convince yourself that with todays economy and todays investing environment we can sustain these nosebleed prices indefinitely.

Its possible. A lot of folks in '28 and '29 were pretty sure of it. A whole lotta folks in '99 and 2000 thought it was all different and that internet companies were the bomb. Well...they were...sort of...

 

[Spanky]

The latest Price Earnings ratio on the S&P 500 Index is 20 as of March 31, still overpriced when compared to a normal of about 15 times earnings. Roprts on the economy have been mixed. The future is still uncertain. The only safe place is Treasury Direct.

 

[rapoole]

Choson-

The right time to start investing is always now, ASAP today. There is no way to know whether the market is overvalued. Fortunately, in your accumulation phase, it doesn't matter. Just invest a fixed amount at a regular interval, and the miracle of dollar cost averaging will solve any overvaluation problems.

By the way, how did you pick your handle. Choson reservoir?

rapoole2000

 

[wildcat]

If you all believe in the EMT and buy index funds then why do we have so many market timers & fair value scientists? Just curious b/c the two seem to contradict one another.

 

[unclemick]

Wlliam Sharpe has taken a stab math wise at different agenda's though his utility function struggles.

I'm with Bogle - and with Ben Graham(Buffett to a lessor extent).

CMH is important while you are debating EMT. And value will never go out of style while you are debating the persistance of the value premium.

Distribution is different than accumulation.

De Gaul and the Norwegian widow ride on. At twelve years into ER - I bet both horses to place and show.

Balanced index plus dividend/value stocks on Ben Graham's 'middle way.'

 

[thechoson]

Choson-

     The right time to start investing is always now, ASAP today.  There is no way to know whether the market is overvalued.  Fortunately, in your accumulation phase, it doesn't matter.  Just invest a fixed amount at a regular interval, and the miracle of dollar cost averaging will solve any overvaluation problems.

     By the way, how did you pick your handle.  Choson reservoir?

rapoole2000

Haha, most of my peers don't guess that, I guess you'd either have to be a history buff or old enough to have served in Korea to know about the Choson Reservoir. Partiallly true, my nationality is Korean, so just a reference to that, I guess. haha

 

[cute fuzzy bunny]

If you all believe in the EMT and buy index funds then why do we have so many market timers & fair value scientists? Just curious b/c the two seem to contradict one another.

Not at all.

I believe 100% in the whole long term index fund buy and hold thing.

I also firmly believe that WHEN you first commit those funds matters, and I also believe that robotically not observing major market events and acting on them can cost you money.

Of course, its hard to be right during those major market events. So far I've been right twice and it enabled my ER.

I got the heck out of equities in early 2000 because the prices were ridiculous. I could've mumbled things about market efficiency and long term buy and hold works and have half my money today.

I bought in big after 9/11 when everyone was uncertain and the markets had been bashed to hell and back. After all, you only needed to believe that we'd bounce back.

Autopilots really, really good 99% of the time. But when things go balookas to the upside, you might wanna consider taking money off the table. When they go on fire sale, you gotta think about buying.

Bear in mind, I'm not saying 'twitch twitch twitch' like a day trader, I'm saying make 3-4 major buy/sell decisions during your investing career.

If you believe in "market efficiency" towards pricing, then the market was efficient and fairly priced in january of 1996, january of 2000, january of 2002, three months ago and today. Apparently market efficiency and fair value also means you can experience 25-50% swings in your investment portfolio.

By the way, that PE of 20 thats higher than the long term average of 15? Presumes the next 5 years earnings are at the same pace as today; as I mentioned...nobody expects that pace to continue unhindered for 5 years.

In conditions like these, I believe that its critical to establish a conservative asset allocation, look to current income from high dividend stocks and high quality short term bonds and cash instruments. For equity investments strong sector picks and value stocks that may also be overpriced but have less far to fall.

Should we continue on this downward leg, I'll be a buyer of equities, possibly even the old s&p/tsm indexes. Should we get the worst end of it and go sideways another 5 years, I might consider them then as well.

 

[laurence]

Choson, it should be said that everyone's situation is different, for TH there is no point in accepting greater risk, so why do it? If I was in his shoes, I'd do the same thing. But I'm much closer to your situation that his, so being a little more aggressive feels right to me. If you are just starting, DCAing into the market with a payroll deduction in good index funds/well balanced portfolio is a good way to go, especially when you are just getting up to speed on how this all works (like me!).

 

[RockMiner]

I believe 100% in the whole long term index fund buy and hold thing.

I also firmly believe that WHEN you first commit those funds matters

I agree completely if we are talking about investing a lump sum. For a young investor with a long time frame dollar cost averaging eliminates the need to be smart. For an ER ready investor, I think there is a case to be made for defensive timing actions. For example, what is the point in remaining 100% in equities if you can safely retire with a balanced portfolio? The risk taken should match ones goals and time frame.

 

[markplus4]

--I would recommend a healthy dollop of emerging market small cap funds. These countries have long term demographics on their side & significant growth upside.
--Non inflation indexed Treasuries at these levels are a sucker's bet.
--The U.S. market on an 05 earnings basis carries a PE in the 16-17 range....very competitive with bonds and in the range of fair value. Interesting that there are pockets of small/mid cap tech value...polar opposite of 4 years ago. At least they keep popping up on my screens and eventually in my portfolio.

Just my humble opinion...good luck!

P.S. Just avoid those GM Bonds! Sorry JG, but those would make me really nervous.

 

[cute fuzzy bunny]

Mark - where did that PE number come from? The numbers I've seen for the S&P500 and tsm are much higher than that. Heck, the PE on my large cap value holdings is in that range.

 

[ats5g]

Hey Gang,

EMT/EMH really only talks about the speed at which information [and what types of info] is incorporated into asset prices. EMH doesn't say anything about investors in those markets being rational, irrational, stoned, drunk, etc.

When EMH says the current asset prices are that market's best estimate of those assets' value, that doesn't mean that those prices are "correct". The prices are just the best guess, based on all the info priced into them. In 1999, people knew that hi tech companies were losing money hand over fist, they just didn't care - they were irrational.

You can believe that markets are efficient and believe that future expected returns for stocks are in the 6-8% range. If say long term bonds and long term TIPS have the same expected returns, you have to think about what sort of risk premium that is [e.g. not much]?

You also don't have to believe that markets are efficient to use index funds: The Inefficient Markets Argument for Passive Investing

- Alec

 

[wildcat]

I say the markets are pretty efficient but there may be a few areas of worth exploiting based on research. However, when it comes to market timing, one's ability to pick the bottoms or tops is very small & being able to do so is crucial to returns. I believe in small asset allocation moves (i.e. more money is going towards value index) but I stay in the market & DCA. I know some people will mention Warren Buffet's market views and his investment ability but I am not Buffet and I do not have his skill. I may be different b/c my time horizon is very long but those are my thoughts.

Food for thought in support of buy-n-hold -
From 1982-90 the avg compound return was 18%. If a person was out of the market on the 10 best days over the 9 yr stretch, the avg return drops to 12%. Hike it up to 20 days over the stretch and the avg return drops to 8%. Does it matter whether or not the market reacted rationally on those specific days? Something that makes sense to me may not make sense to the market. It doesn't matter what I feel or think b/c a return is a return. So one's ability to determine the best days so to speak is very small IMHO.

 

[cute fuzzy bunny]

Good info as usual Alec...

 

[scotty]

My 2cents.
i don't think the market is generally efficient. the volitility of the market many times has very little relation with the real situation at the business. ben graham said that in the short run the market is a popularity contest but in the long term it's a weighing machine and the real value will come out.

the pe on the s&p now is about 16. 2004 earnings for the sp 500 will be about $72. that is about the average multiple but with %rates so low it is attractive

my recommendation for a simple investment strategy is to dollar cost average into good quality companies selling for reasonable prices. you can do that in a fund or you can find the companies yourself. as long as you invest when the market itself is not at lofty levels (above an 18 multiple) you will have good results.

 

[Delawaredave]

I'd guess the consenus is the US market is "fairly to slightly over-valued".

I agree. I certainly do NOT think it is undervalued.

If I were a new investor, I would use this time to DCA internationally first. Set a target on global proportion (20-30% if you ask me), and start building mostly that now.

There's "no rush" to jump into the US market now - I would "wade in gently" at best. But I would start.

But what do I know, as I"m still working 60 hours a week at my job.........

Have a great day !

 

[cute fuzzy bunny]

Vanguard shows the PE of their S&P500 fund and the index itself at 18.3

Historic average is in the 15 and change area. Average for the past 25 years (weighted heavily by the 45+ numbers from the late 90s) is in the vicinity of 18.

Morningstar fair value shows the total market as being between 3 and 4% overvalued.

 

[bhh]

I've struggled with this same issue recently. I'm in the buy and hold indexes camp but the giants whose sholders I try to stand on are shouting up at me not to expect the next 10 years of returns to be anything like the last 10. What's a person in the middle of their accumulation phase to do?

Right now I'm figuring out an asset allocation that I could stick to for 5-10 years. For me this'll be more than 1/2 international equity, inc. as much EM as I can stand. (Another nice thing about the foreign index ETF's is they're held in the local currency, so you can diversify currencies as well as asset placements.) Indexes are great but the 'put all your savings in a broad US index' advice just ain't what it used to be. For me, an asset allocation to get money out of the US makes sense. I don't mind buying the US market as it meanders for 10 years, I just don't want everything I've accumulated so far to be sitting in it.

Also, speaking as a 30-something male, we guys can be susceptible to too much tinkering with our portfolios -- not good for long term returns. So I'm hoping an asset allocation plan will give me something to do (rebalance, maybe shift things a few percentage points each year) to make me think I'm doing something and keep me out of trouble. I may also need a little gambling money for the same reason.

Anyhow, good luck.