Jeffrey Kleintop of LPL Financial has an interesting rebuttal to the argument that the market is overvalued:
At any given time, there are always some bubbly valuations among industries and stocks that are hot. But overall, the S&P 500 PE is currently a bit over 16 on current fiscal year estimates, slightly above the long-term average, but only half of what it was in late March 2000. Looking at valuations, compared to 14 years ago, the party in the stock market may not be just getting started — but it is not yet close to being over.
The whole article is worth the read.
Here is what John Lewis, our Senior Portfolio Manager, had to say about valuations in our quarterly letter to clients:
A lot of the volatility and rotation we have seen this year can be attributed to this current bull market turning 5 years old. The stock market has had tremendous gains since the bear market lows in 2009, and that has finally led to serious talk about stretched equity valuations. Some of the good momentum areas like solar stocks and biotechnology certainly fall into this theme, and were sold off during the last couple of weeks of the quarter as these concerns came to the forefront. These concerns surface as any bull market matures, and the truly strong stocks often perform very well long after the serious valuation discussions begin. As valuations become stretched, markets tend to focus more on growth opportunities. That is a positive for our strategies. Relative strength is very good at picking out high growth stocks. Yes, the overall market or certain pockets of the market may be pricey, but that doesn’t mean there aren’t well managed companies capitalizing on current trends that will continue to perform. That is often a great environment for our strategies.
The debate about valuation will rage on, but for momentum investors, having slightly stretched valuations may just be the environment where we can really shine.
