Market High, but Not Dear
Market Technicians will take one look at the following chart and scream “Look out below!” They expect the current peak to be the precursor to another sharp sell-off.
While the patterns looks similar, the fundamentals of those three tops were very different. The year 2000 pinnacle clearly marked an overvalued and unsustainable frenzy. P/E multiples on blue-chips and tech stocks were excessive. The market’s price/dividend ratio was absurd.
The top of 2008 was more a result of crazy credit markets than outlandish multiples. The Bear Sterns fiasco preceded the Lehman bankruptcy which led to the AIG bailout. The banking system was in jeopardy as money market funds and commercial paper became suspect.
The second-half nearly 50% decline blindsided most investors and fund managers because it did not originate from clearly overpriced conditions.
Today the opposite condition prevails. Nominally high readings on the DJIA, S&P 500 and NASDAQ mask what would be relatively reasonable valuations in a normal interest rate environment. In what is still a ZIRP world, today’s multiples are not really high.
A glance at the market’s current price/dividend ratio shows it sitting near the low-end of where it spent most of the past 16 years.
The end of August numbers told the story accurately. Traders who heeded facts, rather than paying attention to the doomsayers and chartists, were picking up bargains in August, not selling.
It is easy to forget that 10-year Treasuries were yielding 6.2% in 2000 and 4.7% as recently as 2007. Those rates provided relatively risk-free competition for equities. Alternative choices to stocks appear extremely unattractive at present.
The takeaway? Don’t be scared by the S&P 500 at 1671 and a 15,063 DJIA. Valuations are far from expensive in a low interest world.
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See more value investing ideas here http://marketshadows.com/value-investing
Market Technicians will take one look at the following chart and scream “Look out below!” They expect the current peak to be the precursor to another sharp sell-off.
While the patterns looks similar, the fundamentals of those three tops were very different. The year 2000 pinnacle clearly marked an overvalued and unsustainable frenzy. P/E multiples on blue-chips and tech stocks were excessive. The market’s price/dividend ratio was absurd.
The top of 2008 was more a result of crazy credit markets than outlandish multiples. The Bear Sterns fiasco preceded the Lehman bankruptcy which led to the AIG bailout. The banking system was in jeopardy as money market funds and commercial paper became suspect.
The second-half nearly 50% decline blindsided most investors and fund managers because it did not originate from clearly overpriced conditions.
Today the opposite condition prevails. Nominally high readings on the DJIA, S&P 500 and NASDAQ mask what would be relatively reasonable valuations in a normal interest rate environment. In what is still a ZIRP world, today’s multiples are not really high.
A glance at the market’s current price/dividend ratio shows it sitting near the low-end of where it spent most of the past 16 years.
The end of August numbers told the story accurately. Traders who heeded facts, rather than paying attention to the doomsayers and chartists, were picking up bargains in August, not selling.
It is easy to forget that 10-year Treasuries were yielding 6.2% in 2000 and 4.7% as recently as 2007. Those rates provided relatively risk-free competition for equities. Alternative choices to stocks appear extremely unattractive at present.
The takeaway? Don’t be scared by the S&P 500 at 1671 and a 15,063 DJIA. Valuations are far from expensive in a low interest world.
*********************************************************************
See more value investing ideas here http://marketshadows.com/value-investing
