By Paul Price of Market Shadows
Those who are expecting stocks to collapse because the market is overvalued don’t know their history. Present day P/E multiples are 45.8% below those at the 2000 pinnacle. They are also at a discount to where they were at the previous peak in 2007.
Corporate balance sheets are much cleaner. Price /Book Value ratios are lower and dividends are higher than at either of those two previous tops. All those observations are on the nominal numbers.
ZIRP has gutted the competition from fixed income. 10-year Treasury yields are now 56.4% and 42.5% below their year 2000 and 2007 levels. respectively.
Lower rates justify higher than normal multiples.
Cash is paying zilch. Bonds have been going down in value. The only reason to sell stocks has been in the hope that you could buy them back later at a cheaper price. Traders got that chance last June. Most short-term players still missed out as the market bounced back after a 5% – 7% decline rather than the desired plunge.
Fear of brewing war in Syria has contributed to the selloff. History says the market’s anticipation is probably worse than the reality. Buying the dip ahead of the 1991 Gulf War certainly paid off well.
I think there is more risk in being out of stocks than of being in them. So many individuals, portfolio managers and hedge funds are now underweight equities that pent up demand could lead to a very sharp melt-up, not the reverse.
Remember last fall’s ‘Fiscal Cliff’ fiasco? The media frenzy had everyone cashing out when they should have been loading up.
Talk of upcoming debt limit debates and a possible government shutdown will serve to entice sellers once again.
