OVERVALUED OR UNDERVALUED?

During volatile stock market periods like the one we are currently experiencing, it can be tough to know if stock prices are expensive or cheap.

Short-term price movements and the never-ending news cycle can make investors anxious and confused. But as long-term investors (which we should all be), short-term price movements are just noise.

One of the tools we rely on in our Beyond Buy & Hold system is what we call a Market Value Indicator (MVI). The MVI shows us at any point in time how the current value of the S&P 500 compares to a “Rational” value for the stock market.

We’ve previously discussed just how irrational the stock market can be. A rational stock market would move up in a fairly straight line over time at a rate of growth of about 7% per year or about 0.6% per month. This pace of increase would keep the price of stocks in line with the increase in corporate profits.

Remember that the value of stocks comes from the profits that the underlying companies produce. In the long-term, stock prices always track with corporate profits. The following graph shows just how irrational the stock market can be. You can see how the value of stocks was double what a “rational” value would have been in 1999 and how it dropped to half of the rational value in early 2009.

HOW ABOUT TODAY?

Looking at the past is interesting, but the more important question is, “What about today?”. After all the movement over the last 18 months, are we currently undervalued or overvalued? This chart shows the variance to “fair market value” of the S&P 500 from 2019 up to the beginning of April 2023.

As of April 1, 2023, the S&P 500 was sitting 9.3% below fair market value. This doesn’t tell us which direction that the market will move next, but it should make you feel better about the value of the stocks that you currently own. Over time, the S&P 500 will move up to its fair market value. No one knows when, but it will move up by at least 10% from the current level.

Our monthly Market Value Indicator is included in your subscription to Market Signals. You can sign up for Market signals by Clicking here.

Happy Investing,

Phil

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Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.