March 2, 2017

On Thursday, the S&P 500 fell 0.6% and Toronto fell 0.4%.

I have just updated my comprehensive analysis of the valuation of the S&P 500 index. I may be in danger of being labeled some kind of doomer since my point estimate for what I believe to be a a conservatively calculated fair value for the S&P 500 shows it to be about 41% over-valued.

Really, the over-valuation is very simple. The actual trailing P/E ratio on the S&P 500 is 25 and that’s 47% higher than the historic average of 17. Now, there are two reasons why it might be quite okay for the P/E to be significantly higher than the historic average. First, interest rates are extremely low. If they stay that way or rise only modestly then a fair P/E ratio is probably quite a bit higher than 17. Second, it could be that the trailing actual GAAP earnings are abnormally low and/or that for other reasons earnings are about to surge. But, a look at the past earnings trend does not support the view that the actual 2016 earnings were much if any below trend. Perhaps earnings will surge with lower taxes and such. Maybe, but historically earnings have not grown faster than nominal GDP over longer periods of time and so I am not about to count on such an earnings surge.

Of course, I like to think that the particular stocks that I own and that are the higher rated stocks on this site will do better than the S&P 500 and are not over-valued. Also, the Canadian stock market is not the U.S. stock market. Nevertheless, if the S&P 500 declines significantly it will pull down most everything with it to some degree. Now, I don’t know if it will decline, at least anytime soon. But it seems prudent to be somewhat cautious and to be in a position to pick up bargains if stock prices do fall.

I am in no way planning to “get out of the market”. But I am now thinking that I would like to be more aggressive in taking profits and raising my cash position.

Those just starting out investing have NOTHING to worry about. In that case a sharp market decline is a good thing. But those near or past retirement age may wish to be somewhat cautious.

It seems to me that much or all of the hoped for benefits of Trump’s plans have already been “priced-in” to the U.S. market. If that is the case then the implementation of the plans would not push stock valuations higher (because they have already been pushed up) while failure to implement the plans would cause stocks to fall.

On top of this we have a higher likelihood of an interest rate increase by the FED. The market may now turn its attention to that.

In terms of the White House, I will admit I am not a Trump fan. Yes, I think some of his policies could be beneficial. I also think he is very intelligent and has accomplished a very great deal in his life. But I also think he is dangerously narcissistic and a pathological liar. A man who seems capable of lieing even to himself, seems dangerous to me. It will be difficult for his advisers to criticize anything he wants to do. And the investigation of ties to Russia during the campaign is not going away and got a lot worse today as the new Attorney General admitted that he cannot investigate it since he himself will be investigated.

It’s actually hard to believe that the S&P 500 has surged in the face of the accusations against the White House.