November 14, 2013 Comments

On Thursday the S&P 500 index rose 0.5% to yet another record high close of 1791. Toronto rose 0.4% to 13,431 which is roughly 6% below its all-time high from 2011.

Most of our stock picks were up today. Notably Toll Brothers rose 2.6% to $33.51.

I have just updated my analysis of the valuation of the S&P 500 index. The trailing P/E on the index is 18.8. That alone suggests it is not attractively priced unless the P/E was based on a depressed earnings level. But the earnings level is not depressed. Unless we expect interest rates to remain low indefinitely (say for decade) and therefore P/E ratios to remain elevated indefinitely the S&P 500 index seems somewhat over-valued. As a point estimate it looks perhaps 18% over-valued. That does not mean it will fall anytime soon. But it does suggest we should be cautious about committing too much of our funds to the U.S. stock index.

In the coming weeks I will update a similar analysis for the DOW (which normally looks like better value than the S&P 500) and for Toronto (which is a more volatile index due to the heavy resource sector representation).