Stocks have had strong returns since 2009. I’ve been cautious on them most of that time and still don’t believe the long-term bear market that began in 2000 is over. Recent research from Crestmont Research explains why this still is a long-term or secular bear market, and the market rise since 2009 is a bull market rally within that bear market. Read this post for an explanation and this one for the full story.
Over the past quarter, the stock market surged ahead, ending almost 10% higher—bringing the total gain for 2013 to 30%. Earnings from S&P 500 companies grow over the long-term at nearly the rate of economic growth. One result of the market surging last quarter and last year faster than normalized earnings growth is that P/E increased and now exceeds the range of “fairly-valued.”As a result, even with low inflation rate conditions, the stock market is now “overvalued.” P/E based upon reported earnings is near 19; it remains distorted below the normalized P/E of 26 due to currently high profit margins. Even though “reported” P/E is lower than “normalized” P/E, reported P/E is relatively high. The trend in earnings should be watched closely and investors should remain cognizant of the risks confronting an increasingly vulnerable market.