Is the Market Over-Inflated? October 2, 2016
Recently, the financial media has focused on a number of pundits that claim the market is grossly overvalued, and that the Fed’s low rate policy has forced stocks into a bubble.
But are they?
An important part of wealth management is to understand the fundamental drivers of the stock market, and how they can impact market prices. This update briefly discusses these issues, and what they may mean for the market.
This update is broken into 2 parts to better serve clients and subscribers;
1) A bullet point executive summary for those only interested in my bottom line perspective.
2) A short video discussion that surveys key factors in today’s market valuation and what they may imply about the next few quarters.
1. Earnings have begun to turn upward, as anticipated in my January outlook.
2. While the earnings growth of the S&P 500 has been muted, other sectors are seeing a stronger move upwards in earnings. Continued growth in earnings is likely to be supportive of stocks moving into year end and 2017, barring recession.
3. We are seeing the benefits of low oil prices in consumer spending. This is a positive for markets and for consumer discretionary spending while it lasts.
4. The S&P 500 is approximately 20% over fair value in comparison with the historical 10 year Price/Earnings ratio average.
5. Other methods of valuing the market say the S&P is less overvalued than P/E ratios suggest, and if the low interest rate environment persists, even the broad the market may represent reasonable long term relative value.
6. The election presents uncertainty, which market generally don’t like. We are likely see a rise in volatility as we close in on November 8.
7. Aggressive rates raises by the Fed are still the greatest risk to markets. As in January, I do not see aggressive rate raises by the Federal Reserve as likely in 2016 or even early to mid 2017.
Short video discussion below. The conclusion starts 14 seconds past the 8th minute of the video if you want to skip ahead.
To Smarter Investing,
ACI Wealth Advisors, LLC
Process Portfolios, LLC.
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