Is the Market Overvalued?

Add comment December 17th, 2007

  Brent R. Brodeski, MBA,CPA,CFP,CFA, AIFA

People seem to be asking this question more lately.  This is not surprising given the recent market volatility.  Interesting though, stock prices are actually fundamentally quite inexpensive relative to recent years.  Globally, P/E ratios globally are in the 16 range as indicated by the chart below.  Of course, in the short-term, this does not mean much.  Stocks can drop when valuations are low (i.e. November).  Furthermore, stocks can still rally strong even if stocks are overvalued (think late 1990’s).  Why is this?  Because in the short-term, markets are 80% emotional.  And emotion essentially ignores fundamental valuations.  In contrast, in the long-term, markets are 90% logical.  Said differently, valuations actually do matter over long periods.  The good news is that the reasonable current valuations may imply the market has quite a bit of long-term upside potential versus recent years.  What should an investor do?  Probably nothing.  Since no one has a crystal ball, just stick your long-term strategy, ignore the market commentators, and read a book or watch a show completely unrelated to finance.