Thursday, 16 January 2014

Is The American Stock Market Overvalued and in a Bubble?

Can any say "Housing Bubble?" Sure you can.  Any American stock market investor, like most of the U.S. population has a short memory when it comes to bad things. Past catastrophes and the housing bubble bursting set off a chain reaction of bad things that we as a nation are still trying to dig out from under.  We’re an optimistic group, after all, so when it comes to common investment risks, investors may wish to find income producing assets in extremely small niche stocks, rather than the S&P.

Almost everyone to whom I pay attention say we’re headed for a fall, but it depends on a number of elements to align.  Bernanke’s asset bubble, as far as both he and Janet Yellen are concerned, is that over valuation is nothing to worry about.  Economic easing by printing money has caused stock prices to rise along with their "value" and corporate bottom lines. Stock prices, real estate and precious metals all rose in 2012 and most of 2013, with gold and silver in a downward slide these past few weeks.  So moving your money there may not meet your goals.

Forbes’ Jesse Columbo believes strongly about the market valuation beyond reasonable back in December, 2013,  Thomas H. Kee Jr. of Stock Traders Daily stated just yesterday the swings in the market this past week call for strict focus, and has been shouting from the roof tops since November, 2013 , that the stock market is way overvalued.  David Kostin of Goldman Sachs, as late as yesterday said there is no rationality to the overvaluation of the market.

Warren Buffet, perhaps the greatest investor in the world – ever, has felt negatively about the value of the American stock market since November, and his position hasn't changed as far as I know.
Here’s his take on how to value the markets. In 1999, and again in 2001, in an interview with Carol Loomis of Fortune:

"The market value of all publicly traded securities as a percentage of the country's business -- that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment."

At a ratio of 70 – 80%, Buffet feels confident the market is doing fine, but heading nearer to 200% is playing with fire.  The Buffet Ratio is currently standing at 134%.  Smell anything smoldering?

The one positive person going on record of which I am aware is Kiplinger’s Anne Kates Smith . The view she sees is continued growth in the market, leaving he bears wanting.

Simply put, the real answer to the question is the American stock market overvalued is "it depends on whom you ask."  Let’s face it, people who are in the market have got to be asking themselves when the ride will end, and nearly no one wants the uptick to stop ticking up. With that being said, people looking for good investments should perhaps begin to look somewhere toward individual under-performing assets. Bubbles burst, don’t they?  Don’t let me sway your opinion.  Think about what your goals are and to what level risk you are willing to sustain. But, if you ask me, the bull can’t run forever.

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