Are Stocks Cheap?

Each and every day, we are bombarded by a never-ending series of asset-gatherers whose sole aim in life is to convince investors to put more money to work. Whether it is because 'we are climbing a wall of worry', whether 'long-term' equity investors always do well, whether the 'cash on the sidelines' is coming out (note - remember there is a seller for every buyer and a buyer for every seller); the most frequently proposed reason for buying stocks is 'because they are cheap'. No matter where they are trading - high or low - they are cheap. Well, in an attempt to suggest otherwise - or at least provide fact rather than accepted wisdom, the following two charts from Morgan Stanley's Adam Parker provide the reality that, in fact, stocks are not cheap - and given where rates are, they are in fact expensive. Empirical fact not fiction.

 

S&P 1500 - Price to Forward Earnings at its long-term median - and highs post-crisis.

 

and give how low real rates are, P/Es shoould be considerably lower...

 

and just what is the market expecting? Huge margin expansion...

As he notes, it seems corporate health is anti-correlated to economic health.

Charts: Morgan Stanley