Stock valuations are attractive although the overall market is not.
Below we present some data in chart form courtesy of multpl.com.
Granted the historic periods are long, the information provides some prospective.
The S&P 500 (S&P) P/E ratio is at 20.17 versus a mean/median of around 16, or more than 20% above historic middle data. This is an indication that the market is "cheap" to the past 15 years but "rich" to the historic data (text in red updated post publication for clarity).
S & P 500 PE Ratio
S&P500 12-month earnings per share — inflation adjusted, constant November 2011 dollars. This number is huge! Again an indication of value in the market.
S&P 500 Earnings
Although chart followers will see the obvious issues with the following, we are at a low level. Without getting into the problems and discussions of "inflation", the S&P is again "cheap" to the past decade and 1/2.
S&P 500 Price, Inflation Adjusted
Dividends are key to our investment approach. As with the inflation adjustment above, the S&P is "cheap" relative to the past 15 years. When looking at this data, it is important to view dividend yield to an alternative, in this case Treasury yields.
S&P 500 Dividend Yield
Although our timeline is short when we enter into a trade, in this case we are looking at stock yields versus bond yields. Comparing stock yields to the 10 year Treasury is appropriate because each represents a long term horizon. There are many theories on the how to value stock yields, we prefer to accept that they represent current value and that the stocks we buy are represent a group that demonstrate stability. This stability is intended to mean stocks that have been around for a long time and are in stable mature industries. 10 years therefore seems about right. Bell weathers of the past such as Kodak, GM, Citigroup have been replaced after a period of time, We see 10 years as "about right" for an average stock to perform at a level of stability.
With the S&P yield at 2.10% and the 10 yr at 1.8%, all seems good on a historic basis. A quick read tells us that mid/med for the S&P has been 4.3% while the same for the 10 yr has been 4.2%. This means that the S&P is "cheap" or conversely bonds are rich. Either way, stocks have value in them on a yield basis.
10 Year Treasury Rate
The conclusion is that as difficult as it is to leave cash, the stock market is "cheap".
On a reciprocal basis, the VIX is at 24. Recently, we have written several times about the VIX valuation on a historic basis. Although 24 is not the high end of the recent range, it is high on a historic basis.
In conclusion, stocks are "cheap" on any number of basis. The biggest challenge we have is getting over the recent market volatility and putting cash to work. This is something we will begin doing in the next few days. We will first evaluate the results of last Friday's options expri and begin looking at our portfolios from a vantage point of what we would like to own versus what we do own. Going into year end it appears our current overweight cash position will be significantly reduced.
Below we present some data in chart form courtesy of multpl.com.
Granted the historic periods are long, the information provides some prospective.
The S&P 500 (S&P) P/E ratio is at 20.17 versus a mean/median of around 16, or more than 20% above historic middle data. This is an indication that the market is "cheap" to the past 15 years but "rich" to the historic data (text in red updated post publication for clarity).
S & P 500 PE Ratio
S&P500 12-month earnings per share — inflation adjusted, constant November 2011 dollars. This number is huge! Again an indication of value in the market.
S&P 500 Earnings
Although chart followers will see the obvious issues with the following, we are at a low level. Without getting into the problems and discussions of "inflation", the S&P is again "cheap" to the past decade and 1/2.
S&P 500 Price, Inflation Adjusted
Dividends are key to our investment approach. As with the inflation adjustment above, the S&P is "cheap" relative to the past 15 years. When looking at this data, it is important to view dividend yield to an alternative, in this case Treasury yields.
S&P 500 Dividend Yield
Although our timeline is short when we enter into a trade, in this case we are looking at stock yields versus bond yields. Comparing stock yields to the 10 year Treasury is appropriate because each represents a long term horizon. There are many theories on the how to value stock yields, we prefer to accept that they represent current value and that the stocks we buy are represent a group that demonstrate stability. This stability is intended to mean stocks that have been around for a long time and are in stable mature industries. 10 years therefore seems about right. Bell weathers of the past such as Kodak, GM, Citigroup have been replaced after a period of time, We see 10 years as "about right" for an average stock to perform at a level of stability.
With the S&P yield at 2.10% and the 10 yr at 1.8%, all seems good on a historic basis. A quick read tells us that mid/med for the S&P has been 4.3% while the same for the 10 yr has been 4.2%. This means that the S&P is "cheap" or conversely bonds are rich. Either way, stocks have value in them on a yield basis.
10 Year Treasury Rate
The conclusion is that as difficult as it is to leave cash, the stock market is "cheap".
On a reciprocal basis, the VIX is at 24. Recently, we have written several times about the VIX valuation on a historic basis. Although 24 is not the high end of the recent range, it is high on a historic basis.
In conclusion, stocks are "cheap" on any number of basis. The biggest challenge we have is getting over the recent market volatility and putting cash to work. This is something we will begin doing in the next few days. We will first evaluate the results of last Friday's options expri and begin looking at our portfolios from a vantage point of what we would like to own versus what we do own. Going into year end it appears our current overweight cash position will be significantly reduced.
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