Is This Market Really Overvalued?

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

The stock market is on fire. On Tuesday, stocks surged about 1% nearly across the board, with the Dow, S&P 500 and Russell 2000 indices each vaulting to yet another respective all-time high.

Given the relentless race to all-time highs we’ve seen this year, it’s more than logical to ask ourselves if the market is overvalued. Well, by just about any metric, including price/earnings (P/E) ratio, Cyclically Adjusted Price to Earnings (CAPE) ratio, etc., the market is at historically high values. But is the market really overvalued?

I was speaking about this subject with my predecessor, Doug Fabian, recently, and he offered me an interesting assessment of this overvalued question, courtesy of his firm, Mercer Advisors.

Doug pointed me to a client note written by Donald Calcagni, chief investment officer at Mercer. I found this commentary compelling, and I wanted to share a bit of it with you this month.

In his note, “Is the Market Really at an All-Time High?” Calcagni begins by acknowledging the concern that investors have about high valuations. However, he strongly challenges the claim that markets are really at all-time highs from a valuation perspective.

As Calcagni writes, “On a valuation-adjusted basis, markets aren’t even close to an all-time high. That zenith, based on the forward price-to-earnings ratio, was reached in late 1999 when the S&P 500 Index peaked at 25 times forward earnings. Today, the S&P is trading at 17.7x forward earnings. Said differently, the S&P 500 Index would have to rally 41% from where it closed on September 30, 2017, to reach parity with its late-1990s valuation — and it would have to do so with no corresponding increase in earnings since an increase would offset any rise in the price of the market index.”

It is the earnings component here that Calcagni thinks is key, and he goes on to write, “And therein lies the real reason equity markets continue to rally — earnings. Cash flows, specifically earnings, drive stock prices. What’s fueling the market is economic expansion and a corresponding increase in earnings. Unemployment is low, wages are rising (slowly), the economy continues to expand (albeit at a below average rate), and consumers are in good shape financially (who, collectively, are responsible for nearly 70% of all economic activity). Subsequently, the S&P 500 Index is on track to post record earnings in 2017 of $130.88 per share. Earnings are projected to come in a full 9.47% higher than 2016. This growth in earnings is keeping market valuations in check.”

I’ve written about earnings being a sort of unsung hero in this age of the Trump pro-growth hope rally, as earnings haven’t gotten the respect they deserve. And despite acknowledging the strong earnings picture, I admit that I have sometimes fallen into the trap of becoming too focused this year on the political market drivers going on in Washington.

And while politics and the Trump pro-growth agenda have been the biggest tailwind pushing stocks higher, very good earnings growth also has been the fundamental lynchpin of this bull market — and this is a fact we must all seat firmly in our minds as we consider this market.

Have you been hesitant to get into this market because of high valuations? Do you want to invest, but are fearful of getting caught in the next market correction? If you follow the investment plan in my Successful Investing advisory service, you’ll never have to worry about knowing when to get out (and when to get back in).

If you’d like to find out how to invest right now with a proven safety switch in place, then I invite you to check out Successful Investing, today!


This Thanksgiving, Be Especially Thankful for You

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I don’t know about you, but I am still feeling stuffed in the aftermath of my multiple Thanksgiving feasts. I’m also still feeling very thankful for all of the tremendous good fortune in my life.

You see, as Americans living in the 21st century, it’s easy to take for granted all the bounty we enjoy. Let’s face it; no people in human history have lived in so much relative luxury, and enjoyed so much wealth, so much prosperity, so much peace, so much freedom and so much safety.

Yet despite our good fortune, many of us feel our lives really aren’t in our control. Many of us feel disconnected with our fellow citizens, and many of us feel the nation is far too polarized both politically and culturally.

Now, I certainly understand the impulse to concentrate on the problems one faces in life. And I also understand that America isn’t a perfect union. All one need do is observe the social animus of over the past year in our nation’s political climate to easily arrive at that conclusion.

Yet despite her flaws, America remains a bastion of liberty, free minds, free markets, free choice and free thought.  

Yes, I know that there are certain forces in Washington, on Wall Street and in academia and other institutions that are intent on exercising control over the economy, the markets and the culture.

Still, I want you to keep in mind that you are in control of the most important ingredient in your recipe for success… and that ingredient is your own choices.

So, I say now is the time to be thankful for the reality that…

  • Only you can control how you approach life
  • Only you can control how you react to events
  • Only you can be mindful of your inner life
  • Only you can take action that benefits yourself, and others.  

Indeed, the fact that you own your own life is perhaps the ultimate reason to be thankful this holiday season, every holiday season… and every single minute of your existence.

As you reflect on the good fortunes in your life, whether that be family, friends, financial success, career success, good health, your church, your faith, your community, etc., I also want you to reflect on that most-important ingredient that makes it all possible.

That ingredient is you, your independent mind and your relationship with reality.

This holiday season, be thankful for everything you have… especially you.


Jobs on Simplicity

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“Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple.”

— Steve Jobs

The Apple impresario was an unequivocal genius, and part of that genius was his ability to make things simple. When it comes to investing, and really anything in life, you need to work hard to make sure your thinking is clean, and not cluttered with extraneous complexity.  

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Jim.


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