The Best Stock Index Valuation Indicator

After the stock surge of 2013, stocks suddenly aren’t cheap and a lot of people are wondering if they are overvalued or in bubble territory. There are a number of indicators of stock market valuation, but they aren’t infallible. Stock markets can stay undervalued or overvalued for a long time after the indicators trigger an extreme reading. But by any measure, U.S. stocks now are fairly valued at their cheapest and are getting near the expensive level by most indicators. Here’s an excellent review of the situation from Bloomberg.com. The main problem with stock valuations is that earnings haven’t increased much for the last couple of years, but stock prices kept surging.

But perhaps the best valuation indicator is Howard Marks of Oaktree Capital Group LLC. A renowned value investor with a long history of success, Marks said yesterday that there aren’t any obvious sweet spots or values in the private markets. And the private markets are cheaper than the public markets, because private market investors demand a price discount for the illiquidity of the investments. I’m not recommending any new sales, because momentum and monetary policy are favorable, but investors should be watching their holdings closely and have a plan for when they would want to sell to protect profits.

“It’s tough out there,” Bill Conway, Carlyle’s co-chief executive officer, said this month. “Finding the right assets at the right prices is tough, but this business is always tough.”

The Dow Jones Industrial Average rose to 16,000 for the first time today, and European shares advanced after the longest weekly rally in 15 months, making it harder to find bargains.

The environment is “not great” for distressed investing, which has forced Oaktree to ask investors for more time to invest its Principal Fund V, John Frank, the firm’s managing principal, said earlier this month. The fund seeks to take control positions in companies that are burdened by debt or experiencing other forms of financial distress.