It’s been a remarkable year, with many lessons. Read more here.
Here’s today’s thought to ponder. Stocks appear very overvalued. In classic financial markets, this matters.In today’s markets, this may not matter. In our brave new world, the support of central banks tends to distort valuations as indicators. However, there’s no harm in being cautious. Read the article here.
Last week we were in San Francisco listening to a presentation by Schwab’s chief economist, Liz Ann Saunders. My takeaway was that the economy is not thriving because of
a. excessive debt in the system.
The excessive debt may or may not have prevented a depression but its legacy is gargantuan payments to keep from defaulting. These will only become larger as interest rates rise.
The complexity is due to technological change and off-the-charts over-regulation. Distractions have grown and regulatory uncertainty is rife.
What will happen? We don’t know. Here’s bond guru Bill Gross’ latest comment.
I’m rejoicing at the recent all time highs in the stock markets. The money gained is real. But I’m also cautious. Let’s stay diversified and careful. We don’t really know what will happen. We need to be emotionally prepared for a downturn, even if it’s slight. Remember, for us, downturns are when investments go on sale. In my professional life, every decline in the stock markets has been a opportunity to create greater long term gains.
Currently the stock markets continue their trend of overvaluation which has defined the past three years. Overvaluation doesn’t mean that a downturn is imminent. On the other hand, it implies that the stock markets are vulnerable. So we need to stay diversified, and we’ll all muddle by. This indicator has been useless for the past three years, so selling out and running away may not be viable choices. Meanwhile, there are genuine bargains in the energy and materials sectors. Also the European indices are becoming attractive. England’s FTSE 100 is trading at 3 year lows.
I’m watching the China exchange traded fund, symbol PEK, which is up about 16% in one day, having fallen close to 40% in one month. I’m also looking at valuation statistics for the United States stock markets. The Value Line P/E is 19.1%, which is historically modestly overvalued. The median yield is 2.1%, again modestly overvalued. The Value Line Median Appreciation Potential is 35%, which is historically profoundly overvalued. These statistics can stay in the “overvalued” zone for years. My perception is that they have stayed high for so long due to artificially low interest rates. They continue to suggest, however, that the possibility of an eventual downturn, perhaps years in the future, is out there. Most of our portfolios are diversified and relatively cautious. At the moment, we’ll continue to stay conservative. We don’t know what will really happen in the short run. Eventually, if and when bargains emerge, we’ll do some buying.