Are US stocks cheap?

For the past few weeks, most of the stocks all over the world had a good rally, including US markets. Some of the markets at this point appear overstretched. 

Is it so? Warton finance professor Jeremy Siegal believes investors investing into "U.S. Treasury bonds could be in for a fall. Those who are now crowding into bonds and bond funds are courting disaster." (Knowledge @ Warton; September 29, 2010). He further added saying "stocks are very good bargain right now for people who are willing to take an extra risk."  Using empirical data he demonstrated (in his book - Stocks for the Long Run) that there has never been a long period when stocks didn't outperform cash, bonds and inflation. 

So what's going on today? How come bonds suddenly appear to be attractive?

Howard Marks, Chairman Oaktree, in his September newsletter writes "I'm no longer an equity guy by profession, and Oaktree manages for more bonds than stocks, but I feel investors may be overlooking some substantial merits on the part of stock today."  Those selling stocks today seem to be overlooking some very attractive valuation parameters. P/E ratios are lower that usual. Companies have healthy cash flows. Dividend yields are same as bond yields etc.

According to Vincent Deluard, TrimTabs' Executive Vice President (The Washington Post; 4th October 2010) "the average retail investor is mislead by history." She says, "in the late 1990s stocks were sizzling and the previous 10 years produced fabulous returns. But then they tanked. Now, stocks are unpopular because they've had a bad decade and a bad three years despite their 75% gain from their low of 19 months ago."  

Currently, investors are bailing out of stocks at a time when equities are relatively cheap. "They are stampeding into supposedly safe bonds, which have done very well the past three years because the Fed has kept interest rates low (ultra-low) by doing extraordinary things that it can't - and won't- keep doing forever."

Conclusion

Draw your own conclusion, don't follow the herd. But again a reminder; investing is stock is risky business and past performance is no grantee of future returns. This holds true for every asset class.

Happy Investing!!!

S&P 500 Index 

P/E ratio of S&P 500