A current concern for many investors is whether the markets are overvalued, where a stock’s current price is not justified by its earnings. After all, no investor wants to overpay for a stock.
Currently, the S&P 500 Index is trading at 18.35x earnings, which is just slightly higher than the index’s long-term average of 16.35x earnings. While the S&P is trading at a premium, we are nowhere near the levels we saw during the Tech Bubble of 2000.
Speaking of the 15-year old Tech Bubble, 2000 was also the last time the technology-heavy NASDAQ broke 5,000, until April 24, 2015, when the NASDAQ closed at a record high. However, the NASDAQ currently trades at 29x earnings, well below the long-term average of 65.81. If you remove the outliers from the Tech Bubble, the median since 1995 has been 30.74x earnings, meaning the index is on par with its historical norms.
The Dow Jones Industrial Average trades at 15.43x earnings, also in line with its long-term average of 15.32. Relative to other markets, the U.S. markets are cheap, as Mexico’s Mexican IPC index is trading around 31x earnings; in London, the Financial Times Stock Exchange 100 Index is trading at 26x earnings; the Deutsche Boerse AG German Stock Index trades at nearly 20x earnings while most of the Asian-Pacific indices also trade around 20x earnings. Historically the average price to earnings for international indices is 22.37x earnings.
Overall, the domestic markets are not wildly expensive. Valuations are not out of control; however, we are due for a pullback. On average, the markets drop about 10% once a year, but the last time this happened was July 2011, around the time when the United States’ debt rating was downgraded to AA+. While margin debt rose to an all-time high in March, long-term charts show that sentiment generally turns before the market enters a decline. With investors continuing to invest on borrowed money, sentiment is still strong.
At Henssler Financial, we invest for the long-term. From a financial planning perspective, we plan for our clients’ liquidity needs for the next 10 years, keeping the money essential for spending out of the market. We invest money not needed for at least 10 years with the intent of keeping it fully invested until it is needed; therefore, we have no reason to be concerned by a short-term pullback. Assuming the underlying economics of the U.S. markets are positive, a 10% drop in the market creates a buying opportunity to purchase shares of solid companies at a good price.
If you have questions regarding your investment strategy given current market conditions, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.