Market Is ‘8% Undervalued’; No Concern With Tapering: Garzarelli

Economist indicators are at a very high level, says the investment advisor, and interest rates won't be spiking sharply any time soon

Don’t be fooled by any market turkeys, says investment advisor and analyst Elaine Garzarelli.

“Based on our proprietary model, the stock market currently, on our very conservative 2014 earnings of 111, is 8% undervalued,” she said in a note to investors on Monday.

“So, people are worried about a bear market, people are worried about a bubble, people are worried about the rise in long-term interest rates, but we don’t see any of that now.”

The analyst, known for predicting the 1987 market crash, is all smiles these days.

“We continue to be in a bull market,” she noted.

“This week our indicators actually rose from last week and the reason was that the Economic Cycle Research Institute Weekly Index rose 2.4% for the week of Nov. 15. It is telling us the economy is coming back from the government shutdown. That’s what we’ve been waiting for, and that’s the reason that our indicators have popped up to 80% from 78.5%,” Garzarelli explained.

Taper Terror

Everybody’s worried about what will happen if long-term interest rates go up, the investment expert says, “then that’s the end of the bull market.”

Not so fast. There’s a long way to go “before the market would even be fully valued,” Garzarelli notes.

“The 10-year bond yield is currently 2.76%,” she pointed out. “If it begins to rise as they taper, those rates would have to rise to over 4%, closer to 5%, our model tells us, before the stock market would be fully valued on 2014 earnings. And our earnings estimates are 10% below the consensus.”

As for market and economic indicators, they would have to fall to 30% to get a bear market, and they are currently at 80%, she shares.

In other words, economic-cycle indicators would have to turn sharply negative.

“Our monetary worth 24% and valuation worth 25% are still bullish – they’d have to go to bearish. And our sentiment is mostly bullish but mixed, and that would have to go to negative,” the analyst said. “So, you know there are a lot of things that have to happen.”

“So, people are worried about a bear market, people are worried about a bubble, people are worried about the rise in long-term interest rates, but we don’t see any of that now.”

(Check out As Monetary Cliff Looms, Economist Urges Fed to Increase QE at ThinkAdvisor.)

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