The S&P 500 has declined about 2% since its all-time high of 2,019, and about 1.8% since it's all time closing price of 2,011.36. The market is in a bit of a downward trend and stocks are still overvalued. We still haven't seen a 10% correction in almost five years, which I feel is a little necessary in this raging bull market. The overall market sentiment is that there is still room to run, as Goldman Sachs believes the S&P will end around 2,050, and Stifel Nicolaus believes it will end at 2,300 by the end of the year. Ladies and gentlemen of the investing community, I believe we are entering into the realm of irrational exuberance.
The Shiller P/E is at 26.3, at about the same level it was at in the 2008 financial crisis, but at least we are nowhere near the all time high in the 2000 dot com crash. We have now put certain controls in place to ensure that a credit crisis like this one wouldn't be repeated, but this doesn't stop investors from being irrational in the valuations they give to companies. Do I think the stock market decline is going to absolutely continue? I can't say with certainty that it will continue, but I can make the case that all signs say that it should. As a value investor, a little discount didn't hurt anyone.
I guess we should start with a Ben Graham quote:
"Somewhere in the middle of the Bull market the first common-stock flotations make their appearance. These are priced not unattractively, and some large profits are made by the buyers of the early issues. As the market rise continues, this brand of financing grows more frequent; the quality of the companies becomes steadily poorer; the prices asked and obtained verge on exorbitant. One fairly dependable sign of the approaching end of a bull swing is the fact that new common stocks of small and nondescript companies are offered at prices somewhat higher than the current level for many medium-sized companies with a long market history. The heedlessness of the public and the willingness of the selling organization to sell whatever may be profitably sold can have only one result - price collapse."In 2007, before the market tanked, there were 213 IPOs that entered the US market. The third quarter for 2014 is at a close, and with one more quarter to go, there have been 204 IPOs to enter the US market. Last year there were 222. In the private equity market, valuations are at even more ridiculous figures, with companies like Snapchat being valued at over $10 billion.
Interest rates are artificially low, which forces investors that are looking for a decent return on their money to invest more money into the stock market. An Iraq War seems inevitable even though the President argues that we won't repeat our mistakes. Europe's economic recovery has been lackluster, and the Ukraine crisis continues. Even with all of this alrarming news, the S&P has been relentless, which isn't a good thing. The global economic and political landscape will affect our economy in the long run. It seems as if the storm clouds of a market correction are brewing but investors are setting up for a picnic.
