Five reasons to Like Stocks

Focus: STRATEGIES

John Boyd Image John Boyd Editor, Fidelity Monitor & Insight

In the Association

Of Individual Investors weekly sentiment poll of 4/20, bullishness] was 25.7%, a new post-election low and the 13th time in the past 14 weeks it has been below its long-term average of 38.4%. As I have noted many times in the past, bull markets don’t end when everyone is bearish!

Stocks Are Undervalued

I bet that got your attention! The overwhelming consensus is that stocks are overvalued. The current P/E of the S&P 500 is around 21. That compares to an average of 19.2 over the past 25 years. While not excessively overvalued, stocks don’t look cheap, either.

However, if we compare stocks to bonds, we get a different picture altogether. To compare stocks and bonds, we look at the yield on the 10-year Treasury versus the earnings yield on the S&P 500.

The earnings yield is just the inverse of the P/E ratio, or the earnings of the S&P 500\ divided by its price. Based on estimated first quarter earnings, and the value of the S&P 500 as of March 31, the earnings yield is 4.71%, versus the 10-year’s current yield of just 2.29%.

The ratio of that 10-year yield versus the earnings yield of 0.49 compares to an average since 1973 of 1.09. No less a sage than Warren Buffett recently remarked: “measured against interest rates, stocks are on the cheap side compared to historic valuations.”

Discounting Of Tax Reform

After Trump’s failure on health care and other stumbles, expectations of a boost to the economy from his tax reform proposal have largely been wrung from the market.

 
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