Stocks are still expensive…

**Stocks Are Way Down. They’re Still Expensive.**
**The S&P 500 still has plenty of room to fall, if history is any guide**
**By Karen Langley, The Wall Street Journal, May 14, 2022**

**U.S. stocks are off to their worst start to a year in more than a half-century. By some measures, they still look expensive.**

**Wall Street often uses the ratio of a company’s share price to its earnings as a measuring stick for whether a stock appears cheap or pricey. By that metric, the market as a whole had been unusually expensive for much of the past two years, a period when especially easy monetary policy turbocharged the popular view that low interest rates gave investors few alternatives to stocks....**

**The market turbulence has drawn comparisons to the bursting of the dot-com bubble in 2000...Companies this earnings season have been mentioning variations of “weak demand” at the highest rate since 2020... The rise in 2022 profit estimates for the S&P 500 is largely attributable to brightening expectations for the energy sector. Without the sector, which accounts for less than 5% of the S&P 500, expectations for the index’s earnings this year would have edged lower from the end of last year...** [end quote]

The Cyclically Adjusted P/E Ratio (CAPE Ratio), which is the Price-to-earnings ratio based on average inflation-adjusted earnings from the previous 10 years, has started to fall from its bubble peak, but it is still above the 1929 peak.

As the Federal Reserve continues to raise (“normalize”) interest rates, this peak will return to normal. Which is a lot lower than it is now.

The WSJ article has an interesting chart showing P/E ration on the X axis and stock price performance YTD on the Z axis. Although there’s a lot of scatter, there’s a clear trend. High P/E stocks have fallen much more than low P/E stocks. In the upper left-hand corner (the cheapest stocks which have risen in price this year) are ConocoPhillips, Chevron, Lockheed Martin and Kraft Heinz. In the lower right hand corner (the most expensive stocks which have fallen hard this year) are Netflix, Amazon, Etsy and Tesla.

This trend has lots of legs. The Fed’s moves have only just begun.



The Fed’s moves have only just begun.

While this is true, it is also true that some of the Fed’s future moves (interest rates and balance sheet adjustments) are already priced into the market. No one knows the frequency or magnitude of the future changes (including the Fed), so everyone is taking their best guess.

While I’m not a market timer, I agree that the trend is downward. Therefore, I’m keeping my powder dry at the moment as I try to time the market. LOL.

I like the companies I own even as they head south for the summer (anti-geese?). I’ve only sold one company so far, but not because it went down in price. I lost faith in management. However, I have too much cash at the moment and I’m itching to get it working.

I promise to let everyone know when we’ve hit bottom. Unfortunately, I’m not going to let you know until about a year after we hit bottom. After all, I’m not a market timer. :slight_smile:



“This trend has lots of legs. The Fed’s moves have only just begun.”

The Fed moves based on economic data - looking back. The market moves based on economic
projections - looking forward - or guessing if you will.

People - individual investors - consider the economy based on their own experience for a
large extent - and read the financial press/ see the financial reports / go to the grocery
and see what they can or cannot afford. They decide if they have sufficient savings to invest or
not - they perceive what companies might do well or not - and where their funds might get a
better return.

Sometimes people are spot-on and sometimes not. Momentum rises and falls based on the fear or
greed factors. But people don’t really wait for the Fed - some algorithms wait for the Fed - or
predict what the fed might do.

I suspect we might be in the midst of a longer-term economic decline - but not based on the Fed.
Based on the amount of spending and arguments over things that have zero economic benefit for
our economy - based on the lack of attention to important financial aspects inside the country -
and based on the fact that the Fed is way behind the data this time.
But this is my opinion and I’ve been wrong a bunch - and so I watch the data and do those things
that I can. Investing more right now is not in the cards - but selling may not be needed to
hold on right now. What might be needed a few years out will determine my actions.

The crystal ball is cloudy.
pretty much like normal.

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While the market as a whole might still be expensive, there are undervalued companies out there. You just have to look.


While the market as a whole might still be expensive, there are undervalued companies out there. You just have to look.

FWIW, Moderna is currently selling at a P/E of 4.