Stocks Are Cheap… Really?

Stocks Are Cheap… Really?

I know it’s hard to believe, but stocks really are cheap…or at least not drastically overvalued as many believe.

As the major indexes have risen steadily since the crises began, a widespread fear has emerged that stocks must be overvalued simply due to their steady upsurge in the face of a pandemic. Right or wrong, we all know that a large part of investing is emotional, therefore this has led many to feel that another crash is on the horizon.

It’s not that I am being insensitive to the world around me, I get it. It feels wrong in so many ways that the stock market has recovered so much so quickly, even though it is just a small sampling of companies powering ahead while the majority of stocks are still down significantly. However, as I have said repeatedly, movements in the stock market are almost always counterintuitive, and this case is no different.

The reason stocks are “cheap” currently has not happened very many times in history. Equities are still a great value because of “relativity”.   

As JPMorgan’s market guru Marko Kolanovic recently stated:

“Equities are cheap compared with bonds based on an equity risk premium framework, which has only occurred 15% of the time historically. We retain a pro-risk allocation in our model portfolio, given the cheap relative valuation of equities, policy support, light investor positioning, and strong rebound in growth which is unlikely to be stymied by new COVID-19-related lockdowns.” 

“Equities indeed appear expensive relative to their own history, but they are quite cheap relative to bonds,” he said. “This dislocation in historical valuations is a direct result of the decline in bond yields, i.e., central banks cutting short term rates to zero, and purchasing of interest rate and credit instruments.”

Kolanovic also believes the investor fears about a Biden victory are overblown, claiming that such an outcome would be “neutral to slightly positive” for the market.

The market will continue to be driven by events that are not on the forefront of everybody’s mind, whether it makes sense or not. I have been bullish since the Fed made their historic announcement on April 9th, and I continue to believe that the economy will bounce back strongly from the pandemic, primarily because the priority will be on job growth and business recovery over other policies talked about in the media that could inhibit economic growth, such as raising taxes.

It’s not going to be easy, not by a long shot. Success requires proper retirement income as well as tax-strategy planning along with an investment approach designed to get the best returns, but with the least risk possible. The things we do for our clients every day. To find out more, just give me a call.

Cheers -Keith

916-925-8900

“Invest for need, not for greed!”

Smart Money Newsletter

Written By: Keith Springer

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