Are stocks undervalued?

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.wsj.com/articles/stock-market-undervalued-bear-m…

**Are Stocks Undervalued Yet?**
**Eight valuation models suggest that even after recent declines, the stock market isn’t a good value**
**By Mark Hulbert, The Wall Street Journal, June 4, 2022**

**...**
**The sobering news is that even at its lowest point in mid-May, the S&P 500 index wasn’t even close to being undervalued according to any of eight valuation models that my research shows have the best long-term track records....**

**On balance, these eight indicators at the mid-May low stood at more than twice the average valuation of the bear-market bottoms seen in the past 50 years. And, seen in comparison with all monthly readings of the past 50 years, the average of the eight measurements was in the 88th percentile....**

**Let’s start by looking at the cyclically adjusted price/earnings ratio, or CAPE...On May 19, the CAPE ratio stood at 30.4. That is more than double the average CAPE ratio at all bear-market bottoms since 1900...**

**Average investor equity allocation. This is calculated as the percentage of the average investor’s financial assets — equities, debt and cash — that is allocated to stocks...at the end of last year it was 68% higher than the average of the past 50 years’ bear-market bottoms, and at the 99th percentile of the 50-year distribution...**

**Price-to-book ratio...Buffett Indicator. This is the ratio of the stock market’s total market capitalization to GDP....Price-to-sales ratio. This is the ratio of the S&P 500 to per-share sales...Q ratio. It is the ratio of market value to the replacement cost of assets. ... Dividend yield ... P/E ratio. This is perhaps the most widely followed of valuation indicators, calculated by dividing the S&P 500 by component companies’ trailing 12 months’ earnings per share. ...**

**It is worth emphasizing that these valuation indicators’ impressive track records are based on their abilities to forecast the stock market’s subsequent 10-year return. ...** [end quote]

Every one of the indicators mentioned above is overvalued. The Percentile of each reading at the stock market’s mid-May LOW was well above the AVERAGE relative to distribution of monthly readings over the past 50 years. This shows that the market is overvalued even at its recent low point. It would have to drop much further to revert to the mean.

Hulbert discussed the indicators in more detail here, where he saw the bubble forming in 2018. The Fed saw the same bubble and began to raise the Fed funds rate, but backed down when the market had a hissy fit.
https://www.wsj.com/articles/the-8-best-predictors-of-the-lo…

Mark Hulbert didn’t point out that the high Average investor equity allocation is due to TINA (There Is No Alternative to stocks) which was caused by the Federal Reserve’s unprecedented suppression of interest rates to stimulate the economy. Now that the Fed is planning to return to “neutral” rates due to inflation, TINA no longer applies. Many people will be selling stocks to buy safer bonds as soon as the yield from bonds becomes attractive.

It’s important to note that these indicators predict long-term results. So the strategy of holding cash through a short bear market in expectation of longer-term stock market growth is the opposite of what this analysis predicts. Unless the Fed returns to ZIRP, the long term growth prospects of the market are very slight since they start from an extreme high valuation.

Here are charts of Hulbert’s indicators.

CAPE
https://www.multpl.com/shiller-pe

S&P 500 PE Ratio
https://www.multpl.com/s-p-500-pe-ratio

Buffett Indicator
https://www.currentmarketvaluation.com/models/buffett-indica…

Tobin’s Q is at a current level of 1.764, up from 1.711 last quarter and up from 1.640 one year ago. This is a change of 3.14% from last quarter and 7.59% from one year ago.

Even with the decline since January 2022, today’s market is in a bubble. Stocks are dramatically overvalued on a historical basis. If the Fed goes back to historical actions (avoiding gross meddling in the asset markets) stocks will return to historical valuations.

Wendy

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My wish/goal is to reenter the market when equities are very undervalued.

China’s fiscal downturn MIGHT give us a major opportunity.

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Meant to say China’s financial downturn.

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While I have been re-allocating the IRA since January (if I had kept that allocation, my losses would be 33% higher), I have a hard time holding a large percentage in cash for anything more than about a week. I’ve seen a large drop in the IRA (-32% from November), and I keep thinking about what I did in 2008, going to more than 50% cash, and staying there far too long. I never had the courage to get back into stocks until it was too late.

That is my big fear this time – I will go to a large cash cushion and save my portfolio as things crash, and then not realize when I need to get back in as things recover. At 55 I cannot afford that mistake. So instead I rotated into more value, less tech, and more ETF and less individual stocks. This feels like a “hope” strategy, and I don’t like that.

I’ve almost talked myself into a Saul barometer. Lately that board has been quiet, with some dissension (mostly from the newbies who got creamed). Not a lot of postings. And the tone is notably less rah rah. If that tone turns back around…

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The stock market discounts future earnings. There’s an awful lot of pent up demand in the economy, and the lack of antitrust enforcement has given the price gougers free reign. I expect we’ll see the “unlimited price gouging” US health care model move to other industries where “job creators” are successful in buying off a sufficiently large roster of corrupt Members of Congress to limit price competition.

That’s a recipe for a big boost in Executive Compensation with even a few baubles left over for the shareholders.

intercst

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bjurasz,

While I have been re-allocating the IRA since January (if I had kept that allocation, my losses would be 33% higher), I have a hard time holding a large percentage in cash for anything more than about a week. I’ve seen a large drop in the IRA (-32% from November), and I keep thinking about what I did in 2008, going to more than 50% cash, and staying there far too long. I never had the courage to get back into stocks until it was too late.

That is my big fear this time – I will go to a large cash cushion and save my portfolio as things crash, and then not realize when I need to get back in as things recover. At 55 I cannot afford that mistake. So instead I rotated into more value, less tech, and more ETF and less individual stocks. This feels like a “hope” strategy, and I don’t like that.

Yes. Glad I leaned that lesson at age 31 after the Black Monday stock market crash in October 1987. Went to all fixed income for 2 years before getting back in. I’m at least 25% poorer today as a result. Stayed invested and rode the market down to 50% drops in my net worth in 2000 and 2008, then recovered to new portfolio value all time highs. Buy & Hold, and limit the “skim” – even just earning market returns over the long term is the path to wealth.

intercst

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“The stock market discounts future earnings. There’s an awful lot of pent up demand in the economy, and the lack of antitrust enforcement has given the price gougers free reign. I expect we’ll see the “unlimited price gouging” US health care model move to other industries where “job creators” are successful in buying off a sufficiently large roster of corrupt Members of Congress to limit price competition.”

One could argue on P/E ratios…whether stocks are above traditional valuations…

If one invested in the FAANG stocks…well, they seem to have been creamed rather badly…along with Tesla and other stocks that rose like rockets… to very very high P/E.

Tesla car sales rode a rocket…up up and up…but everyone has supply chain issues…

I hear rumors of appliances not being sold. New car prices being reduced. (like Chevy Bolt) Of car manufacturers seeing ‘weakened demand’.

The average consumer is getting close to ‘tapped out’ with $5-7 /gal gas prices. Long commutes will eat up half of one’s earnings.

Soon property taxes will rise again… to reflect current ‘valuation’.

Raises have been meager and less than rate of inflation. Same for SS for seniors, while Medicare prices increase more than seniors get in increases.

Gas is more than double two years ago now - and some places triple.

People are still spending… restaurants here in DFW still pretty full. I don’t know about top end places - I don’t use them. Probably CC balances increases, though.

We’ll see. Holding a few dollars in cash (MMF) and will ease in shortly to dividend payers.

t.

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So maybe we should use the volume of posts on stock picking boards as a market indicator?

It would probably be a trailing indicator but only by a few weeks. For a buy signal after the bottom that might not be too bad, but for a sell signal that not be fast enough.

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edited version after the comma

but for a sell signal that might not be fast enough.

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← I will go to a large cash cushion and save my portfolio as things crash, and then not realize when I need to get back in as things recover. >

The “mungofitch 99-day rule” says to wait to buy back into stocks AFTER they have made new highs for 99 trading days. That’s because many bear markets have temporary pops and waiting 99 days keeps from buying into bounces in a still-declining market. In a lifetime, the 99 day delay isn’t significant.

To pick up a little interest, put your large cash cushion into 3 month Treasury bills at TreasuryDirect.gov. Link your savings (or brokerage) account to TreasuryDirect.gov to transfer the funds. When the time is right to buy stocks, transfer the money back as the T-Bills mature.

Wendy

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New car prices being reduced. (like Chevy Bolt) Of car manufacturers seeing ‘weakened demand’.

Most likely that is an outlier. They still have not replaced all the possibly fire-prone batteries in the existing cars. They probably did some focus groups of some type and discovered that people looking for EVs were not even considering the Bolt due to the reports of the fires. Thus the price cut so they could sell something until they come out with some newer models in a couple of years.

If they do not sell enough EVs they have to by credits from another car maker (i.e. Tesla) and they’d rather not do that. This is different than the federal tax credit of up to $7500 that both Tesla and GM have already maxed out on.

Mike

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If they do not sell enough EVs they have to by credits from another car maker (i.e. Tesla) and they’d rather not do that

Apparently GM banked some ZEV credits when the getting was good.

https://techcrunch.com/2019/06/03/why-gm-and-fiat-chrysler-a…

Meanwhile, GM’s first and only credit purchase has been more recent and with a specific mission in mind. GM already produces an all-electric vehicle, the Chevy Bolt, and until recently was making a plug-in hybrid, the Chevy Volt. These sales would seem to be more than enough to offset sales of its vehicles with tailpipe emissions.

And it has been. GM contends this is an insurance policy against future regulatory uncertainties.

“We do not need credits for compliance today, but purchasing credits is permitted under the regulations and is used as an insurance policy against future regulatory uncertainties,” a GM spokesperson said in an emailed comment.” The filing is a routine procedure that is used to protect interests in performance of contractual obligations.”

intercst

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Though I have realized some gains on some of my shipping ideas (FLNG, ZIM, GOGL), I am glad I have stayed the course on my shipping basket. After ejecting that malevolent spin-off idea, OceanPal (OP)*, from the basket ideas, with the exception of the Dry bulk index ETF (BDRY), the ideas have mostly stayed positive throughout 2022, as has the overall basket.

Green shoots:

  1. Nibbled on techie Salesforce (CRM) prior to a nice bounce
  2. A couple of nibbles on Qualcomm (QCOM) when it pulled back
    • OceanPal (OP) is a spin-off from Diana Shipping (DSX). IMHO, the latter is a decently run entity. Well, it was, when led by the prior generation of Palios family (Simeon was CEO thru 2021). His daughter, Semiramis Paliou, took over as CEO of DSX, and is CEO of the prior mentioned OceanPal. A second daughter, Aliki Paliou, is in charge of a tanker entity, Performance Shipping (PSHG). There seems to be some unsavory behavior with PSHG too. OP and PSHG are both penny stocks now. Each sister has opted to dilute their respectively led companies with a rights/share offering for a supposed fleet expansion.
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Foreign stocks AND the underlying currencies are undervalued. Oh, wait, the Blair Witch is working hard to prop up US stocks and hold down foreign stocks. Never mind.

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For any relative newbies to METAR, us oldsters speak of the “Blair Witch”, semi-jokingly, to mean obscure but possibly intentional manipulation of US markets by “the Blair Witch” to keep things where that unidentified, except by effects and strange artifacts, entities or personages wish the markets to be…

We used to speculate about the entity(ies) and means but if I remember correctly got bored with that discussion.

From that same era, more or less, we have this All Time Favorite youtube investment by Mr. Super Brocoli Man:

https://www.youtube.com/watch?v=0akBdQa55b4

Ah, those were the days my friends!

david fb

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I think all of my assets are undervalued. So there.

1 Like