Don't fall prey to the hype, stocks have room to run.
Bears love to cite the market’s slighter higher-than-typical P/E ratio as a reason why stocks are overpriced and set to fall.
They fail to take into account the almost total lack of attractive, normally available, fixed income competition. The Fed’s ZIRP (Zero Interest Rate Policy) has turned bank certificates of deposit into a cruel joke on investors.
Note that it takes $100,000 minimum to secure that fantastic 1.4% APY (pre-tax) offered on a three-year CD. Even that rate guarantees a loss of buying power on an after-inflation basis, on the official Bureau of Labor Statistics’ (BLS) CPI-U figure.
Risk-free returns have morphed into return-free risk.
Use the old rules to calculate CPI and you’d get the Shadow Stats picture of the rise in the true cost of living. My personal experience says the BLS version should be more properly labeled as BS.
Our leaders can’t afford to publicly tell the truth. If they fessed up they would be forced to dramatically increase social security payments, government pensions and salaries.
Government and investment-grade bonds are no better deal than bank CDs in terms of current yield. Junk bonds might tantilize by comparison, but they subject investors to much of the risks of owning equities.
If you are going to take on that volatility, why not simply own stocks?
The chart below adjusts P/E expectations for various historically official inflation environments. The grey bars show the range expressed to +1/-1 standard deviations.
When looked at in this way, present day stock valuations appear to be a bit lower than is justified.
True inflation that is much higher than publicly acknowledged implies there is even more upside for equities just to get back to a normal relationship with realistic cost of living adjustments.
Mr. Bernanke and now Ms. Yellen have made owning stocks de rigueur if you hope to preserve your wealth over the long haul.
Disclosure: Long equities; I own no bonds.
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