- PE measures suggests the market is overvalued.
- ERP measures suggest that it is undervalued.
- A lot depends on the outlook for bond yields.
Earlier this month, the Post-Crash Bull Market turned five years old, which some people think is close to its expected life span. Everyone has an opinion about whether it is now time to sell or to hang in there. As readers know, I am in the latter camp.
Serious investors need a sophisticated understanding of the tools available to judge whether the stock market is over or under valued. Such a judgement is highly actionable from an investment perspective, unless you still believe in the EMH and the tooth fairy. You can’t look at the market over the past decade and say that market-timing doesn’t matter. If you bought in 2007 and sold in 2009, it mattered. If you bought in 2009 and have held on, it mattered. The market is volatile and inefficient.
The Street is very close-mouthed on this subject. The ignorant blather on TV about the stock market never goes near a discussion of valuation techniques. To get the data you need to calculate it yourself (no thanks!) or go to academia. There are two schools in academia in this discipline: