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December, 2017

MEASURES OF STOCK MARKET VALUATION
by LARRY

A headline from money.cnn.com, dated October 24, 2017, read "Caution: U.S. Stocks have rarely been this expensive," the underlying article by Matt Egan. Since then, the S&P 500 Index has risen a further 4.17%, partly in anticipation of the Trump Administration and Congress successfully passing a tax bill this year. Is it time, then, to jump on the bandwagon and invest more funds, since it appears likely a tax bill will indeed become law, probably this week? Not so fast, if one would take seriously the advice from Matt Egan's piece. Yes, stocks may continue to surge, and few are for long successful at timing the end of a bull market. However, by most standards average common stocks are overvalued, so the bigger risk to investors is experiencing loss of principal, rather than missing out on the rest of this bubble.

Here are a few of the key ways to look at market valuation and what they are telling us today:



The Ratio of Total Market Cap to Gross Domestic Product (quite similar to the so-called Buffett ratio) stood as of the close of trading 12/19/17 at 143%. This ratio has achieved a higher reading, getting up to 153% in 2000, only to be followed by big drops in the stock market later that year, again beginning in 2002, and once more starting in 2008, when we saw the worst financial debacle since the Great Depression. Buffett considers his ratio to show a good buying opportunity when it stands at 80% or below, 56% of its current level. The website www.gurufocus.com estimates that with its present level this ratio is forecasting a loss in average stock prices of nearly 2% a year after factoring in the usual dividend, or a close to 4% fall in the average annual stock price. Investors knowledgeable of these odds must expect they will either weather the storm of coming market declines or else be clever enough to ride the market up to close to its top, then get out in time, and later get back in at again close to the right time, once prices have dropped substantially.


S&P 500 Median Stock to Estimated Earnings Over the Next Year (the S&P 500 median stock to forward earnings or projected P/E ratio) as of the close of trading on 12/15/17 stood at 19.82, higher than 99% of the time. On average the median forward P/E for the S&P 500 Index has been 12.80, 65% of its current level. Pioneer value Investor Benjamin Graham suggested a good time to buy is when the P/E of a large, strong, profitable company with low debt is no more than 7.00, just 35.32% of the current S&P 500 Index median level.

High Quality Dividend Stocks with Good Long-Term Potential

CompanyTicker
Symbol		Recent
Price		Dividend
Yield
AmgenAMGN$177.043.00%
CVS HealthCVS$73.082.80%
McKessonMCK$162.600.90%
SchlumbergerSLB$62.093.20%
WPP plcWPP$84.434.61%
(Statistics are effective 12/16/17.)



The Value Line Investment Survey Average Yield (among dividend paying stocks covered by the investment service). Per a public library's recent issue, the survey's median yield stood at less than 2.00% a year, under half its level in early March, 2009, one of the better times to be a common stock investor. Lately the average AAA rated corporate bond offered the rather competitive income level of 3.5% and without stocks' volatility.


Is there a way to be an investor at these levels and have it still make sense? After all, markets appeared overvalued in 1996, yet went on to much loftier heights before finally collapsing to more reasonable values. Yes, but in my view only if willing to accept a lower return than what has been provided since early 2009 by the S&P 500 Index.

As in the table above, one can pick a handful, maybe up to five, financially strong, dividend paying stocks with low debt and invest a roughly equal amount in each, up to half of one's liquid assets. Leave the balance of one's funds in a money market fund or a low-cost total bond index mutual fund.



If the market value of your portfolio of stocks rises 20% or more, i.e. raises your total liquid assets by 10% or more, sell shares till your stocks are again valued about equally in the stock portion of assets and these equities are again no more than about 50% of your liquid assets. Repeat indefinitely.

If instead your portfolio of stocks falls 20% or more, i.e. lowers your total liquid assets 10% or more, use your less volatile holdings to buy shares till your stocks are again valued about equally in the stock portion of assets and these equities are again about 50% of total liquid assets. Repeat indefinitely or until the total market cap to GDP has fallen to 80% or below. In the latter instance, gradually use remaining non-equity liquid assets to buy more common stock shares till fully invested in financially strong, now low-priced, dividend paying stocks.



For even more conservative folks, a way to probably seldom lose money in stock market investing is to gradually buy the S&P 500 index (up to 90% of liquid assets) via a low-cost exchange traded fund when its average yield is 3% or greater and sell when it has fallen to 2% or below, keeping the remainder of liquid assets in a low-cost total bond index mutual fund. Repeat indefinitely.

Meanwhile, happy surfing amid the ebbs and flows of a stock market's interesting yet demanding waves!



DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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