Stocks are Cheap (No Kidding)

Investors want their investments to provide income and to grow. Stocks are trading at close to their long-term average historical price. Interest rates are low. Therefore, stocks ought to command a higher valuation than the norm.

 

Let's look at the S&P 500 price. As I am writing this, the S&P500 ended June at 1960. The forecasted earnings are $125 and (thus) the price/earnings ratio is 15.68. The long term average P/E ratio is 15.5.(1) Stocks are trading at (or just above) their long-term average prices.

 

Interest rates are at historic lows. The following chart shows a dramatic recent history and compares it to more than a century of interest rates nearly double today's rates. (2)

 
 

If you want both growth and income (even if only at a reasonable rate of return) then you want to invest in stocks, not bonds. And if we are like other investors then all of us want to invest in stocks. We may be willing to pay more for stocks than we would normally because we live in a low interest rate world. In other words, stocks are cheap, in spite of what you may read or hear elsewhere.

 

As Warren Buffet is known for saying, stock market gains are always reaped by the patient, disciplined investor and not by the "rich" or the lucky."

 

In the first six months of 2014, from the trough to the peak, the S&P 500 rose more than 7%. From the prior peak to the trough, the same stock market declined 5%. The average decline in any calendar year is 15%. (2) Bounciness is the reason that stocks give better returns than do bonds. I encourage you, as the bounciness inevitably returns, to bear with these investments that are delivering good value.

 

 

 

1 -http://stockcharts.com/h-hd/?$SPX and http://www.multpl.com/ as of 6/27/2014.

2 -http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_6.27.14

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