Does It Matter When Stocks Are Overvalued?

The bears contend that valuations are becoming a problem. By now, everyone has seen Dr. Shiller's CAPE index and the dire warning it provides. However, valuation is a VERY tricky subject as there are many different metrics to consider and just as many ways to view the data.So, in an effort to determine if valuations are indeed the problem that our friends in the bear camp contend, we thought we would take a look at a couple P/E ratios, the Price-to-Sales, Dividend, and Book Value ratios, as well as a model that looks at stock market values relative to interest rates.

Yes, stocks are overvalued by historical standards using traditional metrics. There is no argument here. However, given that rates around the world are so low, stocks continue to represent RELATIVE bargains! The bottom line is that unless/until the central banks of the world stop printing trillions of yen/euros each year - or until the U.S. economy really starts to kick into gear (which would likely trigger inflation) - it is this RELATIVE valuation story that is likely to dominate the action. Put another way, until the current era of central bank intervention comes to a close, stocks are likely to represent a solid alternative for new money. So... are stocks overvalued using traditional metrics? Yes, there is no denying the facts. However, the question is: Does it matter? And the answer is that until the central bankers stop printing money, probably not.

Source: Benzinga

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