Notes on the current great bull market

A bull market is often accompanied by extreme investor confidence and optimism. It can be euphoric with a feeling that nothing can go wrong as the stock market continually reaches new highs. Historically, as a whole, U.S. businesses have increased earnings and technology has helped improve efficiency and productivity. People take notice, so they take their cash off the sideline and put it to work in the market, essentially ignoring market indicators for fear of being left behind. Even in great bull markets, such as what we are experiencing now, investors must be at least cognizant of indicators. One such indicator that is important to review is the market's price to earnings ratio-or P/E ratio. It tells us whether the stock market is overvalued or undervalued. It shows the relationship between the current price of stocks and companies' earnings per share. If stock prices rise faster than earnings per share relative to their historical average, the market is overvalued. The converse also holds true. Without going more in depth, the P/E ratio is currently well above its historical average, which indicates that the market is overvalued. The Buffett indicator is another leading indicator and used to value the overall stock market. It measures total stock market capitalization to gross domestic product (GDP), or the sum of all goods and services produced within an economy. The indicator's historical value of 100% states the stock market is fairly valued relative to GDP, whereas a reading of 150% means the market is overvalued and a reading of 50% would mean the market is undervalued. Currently, the Buffett indicator is around 150%; we have not seen these levels since the late 1990s. Another key metric to look at is a market's interest rates. Interest rates can present a headwind to the U.S. economy. In fact, Warren Buffett has famously been quoted as saying that interest rates are like gravity because when interest rates rise, they pull stocks down. To understand why, one must first understand that the 10-year Treasury is a virtually a risk-free asset because it is backed by the U.S. government who, in turn, has the ability to print money to meet its debt obligations. If the 10-year Treasury was at 15% (like it was in the 1980s), would you want to park your money there? When interest rates become more attractive, investors have less of an appetite for stocks, decreasing the demand. However, we are a long way from the 10-year Treasury approaching 15%. Even though a handful of market indicators show that the market is overvalued, there are key reasons to stay invested: for diversification purposes and the impact of compounded returns over longer periods of time. As Mark Twain once said, "History doesn't repeat itself, but it often rhymes." If you can patiently wait for the stock market to go down it will present extraordinary buying opportunities. Even as the current bull market may be showing signs of aging, the costs of trying to time the markets could prove quite costly to investors' longer-term investment portfolios. ----- Taylor Reynolds is an equity analyst for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, non-profits and trustees. Offices are located at 183 Sully's Trail, Pittsford, NY 14534, (585) 586-4680. Published: Mon, Apr 30, 2018