The stock market has soared nearly 12% in just 8 weeks since the election in November. The price-to-earnings ratio is now sitting at 25, which is about 60% higher than average; the average is 15. If the market is so overpriced, what is the next move overall? And, is it too late to get into the market? Here are some ideas on how to find bargain-priced gems in a market that is likely to sell off.
It is the beginning of the new year and a good time to assess where things are in the financial world. Specifically, I wanted to look at the U.S. equity markets. Since the November election, the Dow has been on a massive tear upward. The composite index has risen from 17,883 to just a whisper under 20,000, a move of nearly 12% in under 2 months time.
When you see this move on a chart, or just sit back and think about it, you have to ask is this an appropriate time to buy into any stocks seeing that there has been a dramatic move upward.
The answer to that question is the answer to any question: that depends. There is never a straight-line, linear answer to any question. It may be that the overall market is too high. But, it may also be that there are opportunities within any one specific equity.
Looking at the overall market the Price-to-earnings ratio is high. It is sitting at 25.83 at the time of this writing, although the stock market is off today, the first trading day of the year. The average over the past 25 years for price-to-earnings ratio is 15. That is 60% higher than average. If you consider the overall market, for the market to get back in line with the average, companies are either going to have to increase earnings markedly, almost 60% or the market is going to have to sell off back down to the average price-to-earnings ratio; that sell-off is going to have to be the same of 60%.
What do I really think is most likely? I think there is going to be a hybrid move of both scenarios, earnings will increase throughout the year while certain stocks will come down in price to more moderate levels.
When you consider a price-to-earnings ratio of 25, what are you really getting? Say you are looking at a stock trading at $100 per share. With a PE of 25, you are getting $4.00 per share in earnings. That means the current level of expectation of earnings for that company is merely $4.00. That is only 4% per year return on investment. While that is still above the current rate of most interest rates it is a very low rate of return overall.? There are plenty of stocks that are selling at better rates of return. So, why would you get involved in these higher priced stocks?
Most likely, professional traders, who are savvy enough to see the overall landscape of the market, will begin taking profits. This will push prices lower and lower. The market will sell off during this process. At the same time, lower-priced stocks, with lower price-to-earnings ratios, will see buyers step into the market on these stocks and keep the prices up. This whole process will not happen in just one day.? Nor will it take and entire year. So, there is going to be a balanced move in both the buying and selling.
There are plenty of opportunities in the stock market right now. But, you have to pick and choose what you are looking for. Considering where a stock is at this moment versus where it will be in a year is a tricky process. Look for companies that will more easily expand their bottom line in an economic landscape that is growing faster than expected. First tier companies are excellent staring points, versus manufacturing companies that will see new orders coming in from retailers.
|This story from Macroaxis reported on January 3, 2017 contributed to the next trading day price increase.The trading price change to the next closing price was 7.55% . The trading price change when the story was published to the current price is 4.00% .|