Is this a Fairly Priced Market?

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Is this a Fairly Priced Market?

by | Mar 16, 2017

There are numerous prognosticators purporting extreme valuations by the so called “perma-bears” who tend to cost investors more than they save them by warning of a doom and gloom market scenario.  We have indeed seen valuations run up to the latest forward PE ratio on the S&P of 17.8x forward estimates vs. 15.9 for the 25 year average.  This is certainly no bargain pricing but neither is it extreme as we saw in 1999 when the S&P was valued at 25x forward estimates.  Please see below the latest comments from Andrew Adams, the Raymond James Financial Strategist working with the well -seasoned Jeff Saut in an excerpt from Morning Tack dated 3/14/17 (a full copy is available upon request):

To be sure, we are certainly not saying that stocks are cheap or that you can throw all caution to the wind here. As regular readers know, Jeff Saut and I have been advising more caution over the last several weeks, too, as segments of the market diverge from the major indices, but at this point it remains a call to be conservative rather than outright bearish. Speaking again to valuation, we have given our opinion on the matter numerous times so I won’t waste much space on it once more here. Suffice it to say there are additional factors that often go overlooked by the bears that must be taken into account: 1) the fact we’re coming out of a two-year earnings recession; 2) interest rates still being historically low; 3) more high growth/high margin companies in the S&P 500; 4) “intangible assets” making up more of the market’s value; not to mention that 5) all the market really cares about is whether conditions are getting better or worse, not where it is on an absolute valuation basis.

My main purpose in writing this comment, though, was not to defend the bull market yet again but to concede that one day the broken clock bears will be correct. Stocks do go down, after all, despite recent history implying otherwise, but, until the market starts to worry, why should you?

The good news is that a true bear market is not going to happen overnight, and even in the bear markets after the dot-com bubble and during the financial crisis there were signs of deterioration well before the real damage was done. So, this is probably a good time to remind everyone that the unpredictability of the financial markets is why you should stop trying to pick the absolute top, remain diversified, and limit individual position losses before they become too large. Now is likely not the time to go “all-in,” but neither is it the time to go “all-out,” and there is also an opportunity risk of lightening up too much when we’re still in a bull market.”

Over the last 91 years, since 1926, there have been ten bear markets, defined as a 20% or more decline from the previous market high.  They were all characterized by one or more of the following:  A recession, commodity price spikes, aggressive Federal Reserve raising rates or extreme market valuations.   We are not in a recession, but remain in slow GDP growth of 2.1%, commodity prices are much lower than we’ve seen in years such as the price of oil currently at $48.49.  The Fed has raised rates once and is expected to raise 2-3 times this year, which would only normalize where they should  be.  We’ve seen how equity markets are slightly pricey but not extreme by any measure looking at several of the metrics.  

The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Thomas Fleishel and not necessarily those of Raymond James.


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