Bad news: Even after panic, stocks aren’t cheap
Monday, August 24th, 2015
Posted by Michael Jones
The most famous minder of valuations, Robert Shiller, said Friday morning on CNBC that “valuations are high, quite high by historical standards. It’s only been a few other episodes in U.S. history when they’ve been this high.”
Shiller’s reference point for valuations is not the forward P/E ratio, but his “cyclically adjusted price-to-earnings ratio,” which compares current prices to the last ten years of earnings. Thanks in part to the low earnings engendered by the recession, that ratio remains at sharply elevated levels compared to history.
While the Yale professor and Nobel laureate economist noted that it’s impossible hard to make a short-term market call on valuations, he ventured that when it comes to the likely direction of the next move, “I have a general bias towards down, because the market is overpriced.”
“The market’s thinking more about macro as opposed to whether valuations are high or low or whatever,” commented Curtis Holden, senior investment officer at Houston-based Tanglewood Wealth Management. “We certainly haven’t seen enough of a correction yet that you can broadly say stocks are cheap. But even if they were, that wouldn’t assure that they won’t fall further.”
Even some who remain bullish amid the selling, like Louis Abel of Irvine, California-based wealth management firm First Foundation Advisors, say that current valuations are leading them to overweight certain types stocks at the expensive of others.
“The stock market is expensive, but not egregiously overvalued. Valuations don’t suggest that we’re about to fall off of a cliff. But they do lead us to focus on mega-cap high-quality stocks at the expensive of small-caps and momentum-oriented social media and biotech names,” Abel said in a Friday afternoon interview.
So if valuations don’t provide a compelling reason to get in, does Monday threaten to bring further losses?
“I think the relevant phrase is that it’s too late to sell—but certainly too early to buy,” SP’s Blitzer said. “Sometimes what happens is that after a drop like this is that people worry themselves sick the entire weekend, and then they come in early and they sell.”
Blitzer’s example of this is a particularly scary one for the bulls: Monday, October 19, 1987—the date better known as “Black Monday.”
That session, in which the Dow Jones Industrial Average lost 22.6 percent of its value, was preceded by a Thursday drop of 3.8 percent and a Friday decline of 2.4 percent.
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