Stocks at Bargain Levels

Bloomberg.com caught a lot of attention yesterday with a somewhat misleading headline, “Record U.S. Stocks at Lowest Valuation since 1980.” You might ask, how can that be when most analysts say the stock indexes are somewhere near fairly valued. Reading the article further reveals that the real point is that the price-earnings ratios are the lowest they’ve been at any new market peak since 1980.

The only thing to take away from this is that despite the higher prices and the more-than-doubling since 2009, investors still have been cautious about stocks. Investors aren’t heavily-allocated to stocks. I believe there is room for stock prices to rise higher over the next year or so.

While individuals added almost $20 billion to U.S. stock funds this year, the amount is just 3.5 percent of the withdrawals since 2007 and compares with $44 billion placed with fixed-income managers in 2013, according to the Investment Company Institute. For bulls, the absence of private buyers shows there’s plenty of money to keep the rally going. Bears say the pessimism means the rally is too dependent on Federal Reserve stimulus and will fizzle once central bank support ebbs.

“I was down on the floor of the New York Stock Exchange when the Dow hit its new high and there weren’t any champagne corks popping or people getting excited,” Michael Holland, chairman and founder of New York-based Holland & Co., said in a March 14 phone interview. His firm oversees more than $4 billion. “Valuations are extremely low. When there’s an absence of really bad news, the path of least resistance is up.”