Investors know that a bear market in stocks is coming to an end when they remind anyone who hears that equity funds are overvalued or undervalued.
We’re not there yet.
Bull market sentiment dominates and investors focus on short-term technical issues such as momentum, trend following and chart patterns. Only at the end of bear markets do you start focusing on long-term fundamentals.
And now these short-term factors are ruling the minds of investors. In fact, according to a search term frequency analysis on Google Trends, interest in stock market prices is probably lower today than it was two years ago.
Read: Five reasons why energy stocks look like a buy despite a 74% year-over-year gain
Check out the arguments in a recent MarketWatch column that a new bull market has begun. In “Evidence for a new bull market in stocks is piling up fast”, the author only cites technical indicators to believe that a new bull market has begun and does not once discuss valuations. It used a composite of indexes including the S&P 500 SPX.
and Nasdaq COMP,
In his argument.
That’s confusing. As I mentioned in my last monthly stock market price indicators review, market fundamentals have improved significantly since the beginning of the year. At June’s lows, the stock market was projected to not only beat bonds for the next decade, but also to sustain inflation.
“Inflation expectations” may not be enough to motivate investors. However, with inflation currently at its highest in more than four decades, you’d think long-term bulls would find something to celebrate in this correction. No other major asset class is more likely to track inflation over the next decade.
But, by and large, few seem to notice.
This changes when technical indicators become so dire that investors give up hope for a near-term rally and throw in the towel. The only thing investors can hang their hat on at that point is the historical truth that, ultimately, the market will respond to fundamentals. In this sense, the extensive focus on valuation is evidence of the potential of capital, given its accompanying poor-market-end despair.
Therefore, we should focus not only on what the evaluation indicators themselves say, but also on whether the investment community is paying attention or not.
Price indicators do not yet support a new bull market.
In the meantime, the chart below shows how each of my eight valuation indicators stacks up against the historical range. As you can see from the column, comparing current prices to those at the end of last year, today’s market prices are more attractive than in January.
| The latest | A month ago | The beginning of the year | Percentage since 2000 (100 most bearish) | Percentage since 1970 (100 most bearish) | Percentage since 1950 (100 most bearish) | |
|
P/E ratio |
21.76 |
21.41 |
24.23 |
48% |
67% |
76% |
|
CAPE ratio |
31.63 |
28.90 |
38.66 |
87% |
88% |
91% |
|
P/dividend ratio |
1.59% |
1.72% |
1.30% |
85% |
88% |
91% |
|
P / sales system |
2.60 |
2.56 |
3.15 |
92% |
92% |
92% |
|
P/book ratio |
4.18 |
4.11 |
4.85 |
95% |
91% |
91% |
|
Q system |
1.81 |
1.78 |
2.10 |
92% |
96% |
97% |
|
Buffett Ratio (Market Cap/GDP) |
1.72 |
1.69 |
2.03 |
93% |
97% |
97% |
|
Average family equity allocation |
49.7% |
49.7% |
51.7% |
95% |
96% |
97% |
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay for audits. He can be reached at mark@hulbertratings.com..