Valuation metrics show that markets aren’t near bubble levels
Is now a good time to come off the stock market sidelines? (Part 2 of 4)
In fact, according to BlackRock’s recent Investor Pulse survey of 4,000 Americans, U.S. investors continue to hold a sizable percentage of their assets in low- or no-return cash investments.
While I wouldn’t say now is a bad time to enter the stock market and I don’t believe equities are in a bubble, I would be a little bit opportunistic when entering the market today.
Market Realist – According to the mentioned survey conducted in 2013, cash was the dominant asset class among 48% of respondents. Also, 50% said that they would continue to maintain holdings in cash with no plans of shifting out of the segment within the next 12 months.
Market Realist – The graph above shows the findings of research conducted by State Street Center for Applied Research. As per the results of the survey, retail investors were globally holding an average of 40% of their assets in cash in the first quarter of 2014, up from 31% in 2012. This tells us that the phenomenon of holding cash isn’t limited to the U.S. It’s a universal phenomenon.
Concerns about overvalued markets are depleting investor confidence. But markets aren’t anywhere near bubble burst levels, as you can see in the next graph.
Market Realist – The graph above shows that the Shiller price-to-earnings ratio for the S&P 500 (SPY) is currently hovering around 26x. The metric was hovering around 27.6x before the financial (XLF) crisis of 2008, at 44.2x during the technology (XLK) bubble burst of 1999, and at 32.3x before the 1929 crash.
Robert Shiller, the developer of the CAPE or Shiller price-to-earnings ratio, defined it as the price of a share divided by the ten-year moving average of its earnings. The metric is used to indicate valuation levels in broad market indices like the S&P 500 (IVV), the Dow Jones Industrial Average index (DIA), and the NASDAQ (QQQ).
The graph shows that U.S. markets aren’t near historical bubble burst levels. This indicates the reason for investors’ caution but not for their avoidance.
Read on to the next part of this series to learn which segments could prove to be prudent for investments in U.S. equity markets.
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