{"id":10189,"date":"2022-02-24T09:12:07","date_gmt":"2022-02-24T09:12:07","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=10189"},"modified":"2022-02-26T13:05:36","modified_gmt":"2022-02-26T13:05:36","slug":"are-stocks-too-expensive-2","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/are-stocks-too-expensive-2\/","title":{"rendered":"Are Stocks Too Expensive?"},"content":{"rendered":"\n

Justin G. from Newark, N.J. asks: <\/em>Hello Mitch, I was\nthinking of investing some cash in the stock market with this latest pullback,\nbut I noticed that the CAPE ratio for measuring valuations is currently above\n30x. It feels like stocks are still way too expensive! What are your thoughts?<\/p>\n\n\n\n

Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n

Thanks for\nwriting, Justin. Let me first clarify a point for readers who may not be\nfamiliar with the CAPE ratio. This ratio is a valuation tool that takes the\nprice of the S&P 500 index and divides it by the average of the previous 10\nyears of earnings, adjusted for inflation. <\/p>\n\n\n\n

I think there are\na couple of key flaws with the CAPE ratio. For one, it is always looking at\nhistorical earnings, making it a backward-looking metric. The stock market does\nnot care about where earnings have been, but rather where they are going.1<\/sup><\/p>\n\n\n\n

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Just imagine\u2026you\nare working hard to build up your retirement and then the market plunges. What\nhappens to your portfolio? Your assets? <\/p>\n\n\n\n

Having a lack of\nclarity about your investment goals could lead to much uncertainty and\nnervousness when it comes to building a solid retirement strategy. It is\nimportant not to get caught up in the fears of the unknowns and miss the\nopportunities ahead.  <\/p>\n\n\n\n

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The second issue I\nsee is that the CAPE ratio has not been a meaningful forecasting tool for\nwhether the stock market is about to do well or poorly. Here is a glaring\nexample of what I mean: back at the beginning of 2010, the CAPE ratio was at\n20.3x \u2013 putting it well above the historical average of 16.3x dating back to\n1881. Many prognosticators used the high CAPE ratio to predict a decade of weak\nreturns for the S&P 500. <\/p>\n\n\n\n

The opposite\nhappened.<\/p>\n\n\n\n

Over the 10 years\nending December 31, 2019, the S&P 500 delivered an annualized return of +13.6%<\/strong> \u2013 well above the long-term\naverage for the index. Any investor who used a high CAPE ratio in 2010 as a\nthesis to underweight stocks for the medium term likely felt an adverse impact on\nreturns.<\/p>\n\n\n\n

Even though the\nCAPE ratio was signaling a challenging road ahead in 2010, the stock market\nboomed. Why? Because earnings boomed. In short, the CAPE ratio does not offer\ninvestors any insight as to what\u2019s ahead for earnings. The ratio itself is\nincapable of telling us anything about what sectors are poised for growth, what\nindustries are poised to thrive, and what innovations could drive new profit\ngrowth and fundamentally change the way the economy works. And at the end of\nthe day, that\u2019s what the stock market moves on.<\/p>\n\n\n\n

You are correct to\npoint out that the CAPE ratio is currently above 30x, and by my last check is\neven above 35x. That\u2019s higher than the ratio was in September 1929 (32.6x)\nbefore the Depression, but not as high as the record set in December 1999\n(44.2x). But what does that high CAPE ratio tell us? If the market is currently\ntrading at high levels relative to historical earnings, but then earnings soar\nin the years ahead, does it matter? <\/p>\n\n\n\n

In my view, the\nkey fundamental to monitor is where earnings are expected to go in the next\ntwelve months, and how the market is currently priced relative to those future\nearnings \u2013 not past ones. <\/p>\n\n\n\n

The future of the market is unpredictable \u2013 and that\u2019s why I\nrecommend that investors, especially those who are nearing retirement, start\nplanning a retirement strategy that takes the \u201cwhat ifs\u201d into account. Never\ngive in to the fear of what\u2019s to come. It\u2019s better to prepare for it! Our free\nguide can help you to prepare as you strive for long-term success.<\/p>\n\n\n\n

If you have $500,000 or more to invest, get our free guide, How\nSolid Is Your Retirement Strategy.3<\/sup><\/em> You\u2019ll get valuable and\npractical ideas to help build a \u201cweatherproof\u201d retirement strategy that can\npotentially protect your retirement nest egg from any storm that could threaten\nyour financial security.<\/p>\n","protected":false},"excerpt":{"rendered":"

See what the CAPE ratio tells us or does not tell us about the market<\/p>\n","protected":false},"author":3,"featured_media":7436,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-10189","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/10189","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=10189"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/10189\/revisions"}],"predecessor-version":[{"id":10192,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/10189\/revisions\/10192"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=10189"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=10189"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=10189"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}