Monday, August 30, 2010

Where Should Stocks Be Priced Right Now?

I saw an article today that asked: Are stocks cheap yet? Then I saw another titled: P/E's dropping, but still not cheap yet.

I can't find the articles now, but I imagine they were probably the same story. It got me thinking though... when will stocks be cheap? Or to put it another way, where should stock prices be today?

My thought is that stocks would probably be valued somewhere around where they were shortly after the bottom of 2009. Here's why...

  1. Stocks were over priced in 2008, before the recession, and market crash came to town.
  2. The market oversold in the Nov. 2008-Feb. 2009 timeframe due to an excess of panic.
  3. The only economic growth since the recession started has been the fictional kind that stems from government "stimulus" spending, but this only borrows money (and growth) from the future and shifts it to the present. This is evident in the fact that the stimulus has not created any real economic growth, leading the government to constantly revise the GDP downward.
  4. Companies have improved efficiencies, and cut costs so they have raised their intrinsic values somewhat, but the prospect for revenue growth in the next year remains dim at best for most companies.

Using the S&P 500 as an example, I'd say it's probably got a fair value around the 900 mark. I think this chart helps illustrate that:

But, I'm just an amateur, so what do I know?


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