In the past few weeks we’ve been discussing today’s challenging markets. I thought we would continue this topic with an overview of market valuation and a few specifics on where an advisor can find opportunities now for clients.
According to the total market cap to GDP ratio, Warren Buffet’s favorite stock market valuation tool (see my previous article on this tool), stocks remain overvalued. The index closed at 126.7% on July 16, 2015 (a reading of 100% indicates fair valuation). To put this into perspective, the highest the reading ever was 148.5% on March 24, 2000, just as the Tech Bubble was beginning to burst.
Since February 9, 2015, it has been range bound between 122.0% and its most recent high of 127.2% on June 23. Hence, today’s reading of 126.7% is near the top of the range yet below its all-time high of 148.5%. However, unlike its highest reading which was during the Tech Bubble, there are fewer good investment alternatives available today. This argues that the ratio could go even higher before the next stock market collapse.
I should also note stocks were only slightly overvalued at a reading of 109.4% when the housing bubble burst in mid-2007.
2015 Market Winners and Losers
Let’s start with the worst-performing markets this year, as this is often an opportunity to buy low.
Using category average data from Morningstar, Inc., as of July 17, Precious Metals have been the worst performer at -15.13%. Others near the bottom include Latin America stocks (-9.03%); Energy Stocks (-8.09%); and Broad Basket Commodities (-7.28%). I’m planning to invest in energy stocks, but I’m waiting for another leg down in oil prices before getting in. (For more on energy investing, see my previous news article, What You Need to Know Before Investing in Energy.)
The best performing category this year has been Health Care (21.80%). Japan has also rewarded investors with a return of 16.52% followed by Europe at 10.01%. Next, China has returned 8.88%, despite its recent foray into bear-market territory. So where do you invest? I’m in U.S. and Japanese stocks. I was in Europe until my stops triggered a sale. Now I’m waiting for a dip to get back in.
There doesn’t seem to be a compelling case for investing in stocks. However, as long as cash is at or near zero and the rest of the yield curve is low, stocks are one of the few remaining asset classes where investors can find returns.
However, when you invest, wait for a dip, hold your nose and by all means protect your downside. The next collapse could be around the next corner.
Thanks for reading and have a great week!