Stocks Aren't As Expensive As You Think
With the stock market at or near all-time highs, very few new investors have felt the desire to jump into the melee. I certainly don't blame them for thinking so, after all, the old adage always says to buy low and sell high. So wouldn't you expect far more people to be selling right about now?
Eh, why sell when you can ride this gravy train even higher.
Wall Street analysts have gradually come to the conclusion that stocks are currently overvalued and the market is very fragile (especially given the state of terrorism in the world, and how new world leaders are all over the political spectrum). However, in recent weeks, an article from Business Insider noted that Jim Reid (an economist at Deutsche Bank), compared stock markets around the world to where their PMI (or purchasing manager indices) imply that their respective stock markets SHOULD be.
Commonly, the P/E (or Price-to-Earning) ratio is used to determine if stocks are overvalued or not. If you were evaluating the current state of the stock market using the P/E ratio method, you'd see that it's quite overvalued.
However, this technique using a country's respective PMI index is a little backwards, but if you look at the market in that light, you'll find that stocks are not overvalued.
Below is a table of the regional data that Deutsche Bank collected and compared to the individual country's stock performance. Now, before you lose your mind over understanding this table, I'll explain: the most recent data regarding the US's PMI index came in at 54.8, and judging by Reid's model, the S&P 500 'should have' gone up 13% over the past year, when in reality it went up more than 15%. As such, we should be looking at a projected PMI index reading of 55.5 -- which is superb growth compared to quite a few other countries.
What does this mean? Well ultimately that the market should, in theory, be a lot higher than they actually are given current production levels -- not just in the US, but around the world. Stocks still have quite a way to rise before one can officially consider the market 'overvalued'.
Here is a comparison of the US PMI index versus the performance of the S&P 500 over the past 20 years.