Is the Stock Market Overvalued?

The three popular ways to measure value of the stock market are the trailing 12 month price-to-earnings ratio (P/E ratio), the forward 12 month P/E ratio, and the price to sales ratio.  The question is whether the stocks are over valued at this point.

Historically, the S&P 500 P/E ratio is around 15.  That was what we got accustomed to.  Currently, it in the mid-20’s.  Twice, the S&P 500’s P/E ratio hit the mid to upper 20’s.  It occurred in the late 1920’s and the late 1990’s.  Then, it was followed by a crash.

Will the market crash tomorrow or soon?  Who knows?  All it needs is some jitters.  Right now, everything looks bright and happy.  Every news headline is great.  Fed will raise interest rates 3 times in 2017… Great.  North Korea continues to fire missiles and defies the U.S.A…  Great.    Brexit?  Who cares?  Amazon is doing wonderfully while retail businesses are filing bankruptcy or closing stores… Fabulous.

Every single day, a conservative investor is being punished.  Even if you balance your portfolio appropriately, you are being punished because you are not being aggressive enough.

David Ott, with $1.5 billion under management, said, “Naturally, the market’s high valuation is a concern, but it’s my view that it’s been overvalued for about three years.  Over that time period, the S&P 500 has gone up 30 percent, which goes to show you that you really can’t time the market with any kind of precision using valuation.”

The world is changing in a way that for the “few” of us, we don’t quite understand.  My nephew doesn’t want to own a home because he doesn’t want the responsibilities of being a home owner such as paying taxes, mowing the lawn every weekend, fixing the roof, cleaning the gutters, and so on and so forth.  He wants to spend his money in “experiences,” and travel.  The value we used to hold is now changing.  What we used to learn was saving for a rainy day, it is now being replaced by the 0% balance transfer.  No money to go to the Superbowl?  Get a 21-month 0% APR credit card on purchases because you’ll get the experience you’ll never forget by going to the Superbowl.  When someone told you no one would go to the mall and shop 10 years ago, you snorted and laughed at that someone.  It’s coming true.  We are now shopping in our underwear or probably naked and ordering whatever we need from Amazon.  Why?  The “Stuff” shows up at your door step in 2 days.  Why bother driving to the mall, wasting the gas money, and getting aggravated by other shoppers?

You think the stock market is over valued?  That is still a one million dollar question yet still to be answered.

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