Tags: Hulbert | Stocks | Undervalued | Overvalued

Mark Hulbert: Stocks Undervalued, but Also Overvalued

Thursday, 01 Mar 2012 08:21 AM

As the Dow ticks over 13,000 and new reports of strong U.S. economic growth wash over the markets, it might seem like a good time to buy stocks.

In the medium term, that might be correct, writes market pundit Mark Hulbert of the Hulbert Financial Digest. Long term, however, one very good market cycle indicator sees meager growth for stocks — as low as 1 percent annualized over the coming decade.

Hulbert points out that the S&P 500 Index has just barely eclipsed the same point of a year ago. However, he writes in his MarketWatch column, they do seem cheaper than a year ago, as measured by price-to-earnings (P/E) ratio. A lower P/E would suggest that it’s a good time to get in.

“That ratio for the S&P currently stands at 15.2. The comparable ratio at the end of last April stood at 16.6. So at least according to this measure, stocks are about 8 percent cheaper today than last April,” Hulbert writes.

Using Yale professor Robert Shiller’s Cyclically Adjusted Price Earnings ratio (CAPE), Hulbert finds stocks a 4 percent better deal. Earnings growth has slowed, but that might be a good indicator of long-term growth, Hulbert notes.

Nevertheless, Shiller’s CAPE — which Hulbert points out is highly reliable by economics standards of measurement — suggests that stocks are now well above ratio averages going back over centuries.

“That model’s current forecast: Less than a 1 percent annualized real total return over the next decade,” Hulbert concludes. “That’s far lower than the long-term average of close to 7 percent per year.”

James Paulsen, chief investment strategist at Wells Capital Management, seems to agree with Hulbert’s medium-term projection on stock prices. He told Yahoo that, while a correction in the S&P might be in the works, buy-and-hold investors will come out ahead anyway.

“We will still have some pullbacks and scary moments, but I think we’re a long ways yet from the end of this cycle,” Paulsen said. “If people can stay the course, I think they’ll be happy over time, just as they have been over the last three years."


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