Market Pulse: Market keeps rolling along
May 20, 2013
The market keeps rolling along and there is no reason to believe the great bull run will end soon. In fact, it's easier to make the opposite case. Still, there are a few naysayers.
Some insist that stocks are overvalued, citing the speed with which the market has soared.
Wrong. The market as a whole is not overvalued. The most traditional valuation measurement looks at the market's p-e ratio. Near the 2009 market low the p-e ratio stood at 10, typical of a bear market bottom. Today's p-e ratio based on next year's expected earnings is 15, which is near its historical average. Hardly overvalued.
In another measurement, called the "Rule of 20," fair valuation for the S&P 500 is reached when its p-e ratio together with the inflation rate equals 20. Currently, they total about 17, so there is considerable upside potential. The gap will slowly narrow due to rising price-earnings ratios. And 20 is only "fair value," not the upper limit. The market could sail through that.
Relative to interest rates, stocks are undervalued to a degree not seen in many decades. In fact, the S&P 500 yields more than the 10-year Treasury and there is dividend growth ahead.
Of course, when (not if) rates begin to rise stocks will become less attractive. If rates rise a lot, stocks could become overvalued relative to bonds. No worry about that anytime soon. Without inflation or a rip-roaring economy with sharply rising credit demands, rates will not go far.
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Bull markets typically begin during recessions as investors anticipate economic recovery and rising profits. This one has its roots in the financial crisis. In fact, the market bottomed during the panic (S&P 500 hit 666) in March of 2009 and it is up 150 percent since.
While the prospect of better conditions for the financial markets and the economy amid the mess four years ago initially triggered the rally and sustained it for more than a year, central bank action became more and more important as GDP stumbled along. It still is a key factor and will be well into next year, if not beyond.
Consumer sentiment is up, earnings are rising, and many people are underinvested. For the most practical reason — money goes where it is treated best — stocks are the best place to be. That's because the need for income in a low-rate environment is leading investors to dividend stocks. Above all else, that explains the bull market. And it's not over.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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