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Day 28: Markets are still cheap

The stock market is still undervalued, I really have to laugh when I hear people say that stocks are over priced, the market is over priced; really? Compared to what? Most of us have three asset classes for investing, Real Estate, Bonds and Stocks; I have four, add vintage motorcycles to my list. Real estate and bonds are unquestionably over priced right now. Stocks however are trading at reasonable multiples. I'm certain to get some emails about this and they will contain the cherry picked examples of over priced stocks. So hear me out.

Real estate is over priced in the markets that matter. In San Jose, CA for instance a two bedroom house that sold in the low $300's in 2009 is now selling in the mid $700's. Plus, we are quickly approaching the all time high for membership in the national association of realtors, typically a key indicator for a correction in real estate prices. Interest rates are most likely going to stay down for a longer period of time than most investors are pricing into the market which will further increase real estate prices along with a diminishing inventory. I'll go with one more rate hike in 2017, but not the three that keeps getting batted around. If rates go up too much we'll see the energy sucked out of the market and that would not only be bad for all the new found optimism, it would also be bad for the bond market. You know, that place where the U.S has about $20 Trillion in debt. Janet Yellen for all her fears of the economy overheating isn't going to force a bond explosion. So that leaves stocks.

Right now the average multiple in the market is about 17. You make a dollar in earnings for every $17 worth of investment. That's about 6%. I failed math all through high school, so please whip out your calculators and check me (1/17 = .058, about 6%). My first take is, why would I invest $17 in 10-year US Treasury bonds at 2.5% when I can invest in stocks at 6%? Oh, remember that the stocks have an opportunity to grow, bonds don't. Prices on bonds right now are at all time highs, they are expensive. Not just in terms of real prices you pay to buy bonds but also historically. Consider that the stock market is about at it's 20 and 30 year average at roughly a 17 multiple. The 10-year US treasury 20 and 30 year averages were over 6%, but here we are with 10-year treasuries at roughly 2.5%. Would someone please check the history books and let me know when was the last time the S&P 500 average dividend yield exceeded the 10 year average.

You don't need to bet on a Trump rally or try to guess where congress is going to agree to spend money; that all seems kind of way in the future anyway. The market is trading at roughly a 17 times multiple and it should be up around 20; maybe a little higher but I'll stay conservative. So think about it this way, for every 1 point increase in the multiple, that's a 6% increase! I own some bonds, I recommend muni bonds in every portfolio, but don't short change yourself by dumping stocks. Right now stocks in good companies that pay a solid dividend present a much safer investment scenario than US Treasuries or real estate.

Stay Invested

Clay Baker

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