“Double, double toil and trouble; / Fire burn and cauldron bubble?” Shakespeare’s Macbeth
One comment I heard is that the only bubble is the number of people saying the market is in a bubble. Many factors indicate the market might be overvalued. The list includes P/E ratio, the CAPE ratio, the Buffett indicator, the Fed Funds rate and market concentration. All these indicators show the market is overvalued. Just remember the Federal Reserve opined that the market was a victim of irrational exuberance more than 3 years before the decline. The Buffett indicator shows the market is expensive, but it showed the market was no where near a peak just before the market meltdown in 1987. Some of the arguments are circular. The market Price Earnings ratio is extended but it is influence by a few stocks. One concern is the market is being driven by the magnificent 7 in the US. That may mean the other 493 stocks in the S&P 500 are not overpriced. Next month I might list 5 reasons the market is undervalued.
Remember the market can remain irrational longer than you can remain liquid so be careful when making your asset allocation based on a few indicators.
We reiterate that we focus on individual stocks when making investment decisions. The fact the overall market has a high Price Earnings ratio is less relevant when we purchase a stock trading with a P/E ratio significantly lower that of the market and with a higher yield than the market. One instance are the Canadian banks; they are trading with P/E ratios near 15 times and have dividends around 4%. Yes, when the markets swoon all stocks tend to get taken down but not to the same extent. Take this year, gold stocks have soared after years of being told crypto currencies have usurped gold’s role as a haven. Bitcoin is down slightly year-to-date while gold stocks have powered upwards. It might take time but companies with solid balance sheets and reasonable valuations can provide good long-term returns.
