Thursday , 28 March 2024

S&P 500 Is Still Undervalued By 5.3% – Here’s Why (+2K Views)

“Follow the munKNEE via twitter & Facebook or Register to receive our daily Intelligence Report

[In spite of the Dow now being at] a record high the Risk Premium Factor (RPF) Valuation Model shows that the broader market, based on S&P 500, is still undervalued by about 5%.  [Let me explain further.] Words: 550; Charts: 1

So writes Steve Hassett in edited excerpts from an article* posted on Seeking Alpha entitled Dow Hits Record High But Risk Premium Factor Model Shows Market Still Undervalued.

This article is presented compliments of www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Hassett goes on to say in further edited excerpts:

The RPF Model is a simple approach for understanding intrinsic value of the market. The model shows that two factors drive the market, earnings and long-term interest rates, which drive cost of capital and embody inflation and, for individual companies, a third factor: growth. The RPF Model shows for a given level of earnings and long-term interest rates whether the market is over or undervalued.

This series of articles provides periodic updates to compare predicted to actual based on the latest earnings, interest rates and actual S&P 500 Index values. I’ve written about the model numerous times, so rather than repeat my overview of the model, you can read about it on Seeking Alpha.

The chart below shows actual versus values predicted by the RPF Model for the S&P 500 since 1986.

(click to enlarge) The chart uses normalized yields on 30-year Treasuries of 4.5% (2% real plus 2.5% inflation) from August 2011 through the present to adjust for the Federal Reserve’s artificially depressing long-term rates by keeping short-term rates near zero.

[One can conclude from the above chart] that if you expect earnings to hold at the current level or increase in the coming year, the market is undervalued. Today, the model shows that, with a normalized yield on 30-year Treasuries of 4.5% and using S&P’s trailing twelve month estimated earnings of $98.30, the intrinsic value of the index is 1,622  [or] 5.3% above March 5, 2013 close of 1,540. Since the model shows that stock prices move inversely to long-term Treasury yields, using the actual 3.10% yield on the 30-year, would result an even higher predicted price for the S&P 500.

Some argue that the market is overvalued. The potential validity of their argument is dependent on the underlying reasoning.

  • Those that suggest the market is overvalued because fundamental economic problems such as deficit, increased tax rates or reduced government spending could hurt earnings are making their case based on fundamental principles: if the economy weakens and earnings fall, the market should follow; if inflation increases stock P/E ratios should fall.
  • Others make a naïve argument that the market is overvalued simply because it has increased and hit a new high, so it is due for a correction. Of course the market could decline, not simply because it has increased, …[but because] the fundamentals of earnings and interest rates [have changed]….I advise tuning out those voices and paying attention to the drivers of the market rather than its momentum.

Over the long term it has shown to respond to interest rates and earnings. Focus on the drivers of those factors and develop a view on their direction, then use that to gauge the market.

Over the past 50 years, the market has consistently reverted to the values predicted by the model, which suggests that something has to give. Any combination of the following could restore parity:

  1. we enter into a double dip recession and earnings on the S&P fall by about 5.0%,
  2. long-term rates move much higher, bringing the yield on the 30-year to 4.7, or
  3. equity prices increase

and, indeed, the gap has been closing as equity prices have increased [and would appear to have another 5.3% or more to go to achieve parity]..

Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://seekingalpha.com/article/1249941-dow-hits-record-high-but-risk-premium-factor-model-shows-market-still-undervalued

Register HERE for Your Daily Intelligence Report Newsletter

It’s still FREE
Only the “best-of-the-best” financial, economic and investment articles posted
Edited excerpts format provides brevity & clarity for a fast & easy read
Don’t waste time searching for informative articles. We do it for you!
Automatically receive every article posted – Register HERE
Recipients restricted to only 1,000 active subscribers!
or
“Follow Us” on twitter & “Like Us” on Facebook

Related Articles:

1. Will It Be Different This Time? Will the Dow and S&P 500 Go Up, UP and Awaaay?

investing

Since the late 1800′s, the Dow has experienced three periods where it traded sideways, ranging from 13 to 17 years, [which always] resulted in upside breakouts . The S&P 500 finds itself within a few percentage points of where it was 13 years ago [so the question is “Has the time now come for the Dow and S&P 500 to once again go Up, UP and Awaaay?” Let’s take a look at some charts.] Words: 299; Charts: 2

2. Bull Market in Stocks Isn’t About to End Anytime Soon! Here’s Why

Investing financial markets

As we all know, money printing always leads to inflation. It’s just a matter of figuring out which assets get inflated. This time around gold is not the only beneficiary, stocks are, too, and I’m convinced that the chart below holds the key to the end of the bull market. Words: 475; Charts: 1

3. The Sports Illustrated Swimsuit Issue Indicator Suggests Another Year of Outperformance for the S&P 500

swimsuit 2013

The Swimsuit Issue Indicator says that U.S. equity markets perform better in years when an American appears on the cover of Sports Illustrated’s annual issue as opposed to years when a non-American appears on the cover. [What is the nationality of this year’s cover model? Can we expect returns above the norm or will we see a year of underperformance for the S&P 500 this year? Read on.] Words: 323 ; Table: 1

4. QE Could Drive S&P 500 UP 25% in 2013 & UP Another 28% in 2014 – Here’s Why

investing2

Ever since the Dow broke the 14,000 mark and the S&P broke the 1,500 mark, even in the face of a shrinking GDP print, a lot of investors and commentators have been anxious. Some are proclaiming a rocket ride to the moon as bond money now rotates into stocks….[while] others are ringing the warning bell that this may be the beginning of the end, and a correction is likely coming. I find it a bit surprising, however, that no one is talking of the single largest driver for stocks in the past 4 years – massive monetary base expansion by the Fed. (This article does just that and concludes that the S&P 500 could well see a year end number of 1872 (+25%) and, realistically, another 28% increase in 2014 to 2387 which would represent a 60% increase from today’s level.) Words: 600; Charts: 3

5. Investors, Get Fully Invested! S&P 500 On Verge of Entering Euphoria Stage of Cyclical Bull Market

investing3

[In spite of all that is seemingly wrong with the U.S. economy] I think we are on the verge of entering the euphoria stage of this cyclical bull market where traders become convinced that QE3 is a magic elexir with no unintended consequesnces. [As such,] I see a strong acceleration and a significant and sustained breakout above the S&P 500 September high of 1475. (Words: 264 + 3 charts)

6.  Start Investing In Equities – Your Future Self May Thank You. Here’s Why

investing2

As Winston Churchill once said: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty” and in that vain I challenge all readers to fight off the negativity, see long-term opportunity in global equity markets and, most importantly, remain invested. Your future self may thank you. Words: 732; Charts: 6

7. These 4 Indicators Say “No Stock Market Correction Coming – Yet”

Investing financial markets

While I remain cautious on stocks and the risk trade, the technical picture shows that the uptrend to be intact and the bulls should still be given the benefit of the doubt for now. At this point, any call for a correction is at best conjecture [as evidenced by the following 4 indicators]. Words: 399; Charts: 4

investing hold buy sell

The Dow has surpassed its all-time record high – set in October 2007 – and the S&P 500 is not far behind? Is this the early stage of another great bull market? Let’s look back at the two previous times when the S&P 500 set new all-time highs and see if we can learn something. Wait…first put your “this time it’s different” glasses on. OK, let’s go. Words: 430; Charts: 1

9. Don’t Ignore This Fact: “Greedometer Gauge” Signals S&P 500 Drop to the 500s by July-August, 2013!

stock-market-tsunami

The S&P500 is likely to achieve a secular (long term) peak this month, then drop to the 500s by July-August 2013. This article explains why. Words: 180

10. This Metric Strongly Suggests a Major Correction in the S&P 500 Could Be Coming

stockcrashimages-1

History shows that when investors experience a rapid decline in the amount of available cash in their brokerage account to spend/invest quickly such “negative net worth” leads to major corrections in the stock market. Currently such is the case so can we expect another such decline or will it be different this time?

11. Dr. Nu Yu: Formation of S&P 500′s “Three Peaks & a Domed House” Pattern On Course

economic_growth

The S&P 500 is on its way to building a “Domed House” and to challenge multi-year highs, or even all-time highs, in the process. Based on the forecast of my proprietary Long Wave Index, the broad market should be in a short-term bullish time-window until March 21st/13 by which time the “roof” phase of the formation should be complete with the S&P 500 having reached a projected peak of 1570. Words: 634; Charts: 4

12.  I’m “making the call” for a market correction of 50% – or more!!

stockcrashimages-1

I don’t relish the job of constantly pointing out the risks to the equity markets but since few on Wall Street seem willing (or able) to do this, I’m “making the call” for a market correction, as enough variables have aligned to indicate a high likelihood of stocks heading downwards from here. Words: 1203; Charts: 6

13. Watch Out For Falling Stocks! Here’s Why

stockcrashimages-1

The stock markets make no sense. They have literally lost touch with reality. Divergences between fundamentals, confidence and the valuation of markets are large [and, as such,] cannot last for long….The only  question is how…and how quickly….this correction occurs. Words: 261

14. You Need to Stay in the Stock Market Despite an Impending Economic Collapse – Here’s Why

investing hold buy sell

You need to stay in markets despite an impending economic collapse. [Really?! Yes, really.] Normally such an expectation would be addressed by getting out of the way of the oncoming disaster and taking ones chips off the table [but,] in this situation, there is no place to hide. Low-risk assets, like bonds and near-cash, produce little to no return…and the threat of rising interest rates and inflation make them dangerous.  Higher risk assets are unavoidable, given current conditions. [Let me explain further.] Words: 830

15. You Can Insure Your Portfolio From Potential Capital Loss – Here’s How

investing

Most everything you’ve heard about investing from the mainstream media, your mutual fund advisor and your tax accountant is a lie. You’ve been told…that the entire point of portfolio diversification is to mitigate downside risk yet when the market experiences the inevitable decline, every sector pushes significantly lower – and your “diversified” portfolio suffers as a result, [right? Well, there IS a better way.] Hear me out. Words: 895

16. The U.S. Stock Market Is Overvalued By More Than 50%! Here’s Why

stockcrashimages-1

Key stock indices are becoming significantly overpriced. The value of the U.S. stock market stands at about 133% of GDP. The average for the past 60 years has been around 82%. By this measure, the U.S. stock market is overvalued by more than 50%! Words: 398

17. Stop! Don’t Forget Market Risk – Remember What Happened in 2000 & 2007/8.

stockcrashimages-1

Investors are more bullish now than at any time since 2002 but the current rally has not been fueled by improved prospects of actual growth and wealth creation. Instead, it’s mostly due to:

  1. investors desperate for income denied them elsewhere by central bank policies;
  2. printed stimulus cash seeking a home and
  3. sheer technical momentum

but nowhere do they seem to be considering market risk – the risk that your investment will lose value because it gets dragged down in a falling market. Words: 615

18. Insider Trading Suggests That a Market Crash Is Coming

stockcrashimages-1

What you are about to read below is startling. •Every time that the market has fallen in recent years, insiders have been able to get out ahead of time… •[What] is so alarming [this time round is] that corporate insiders are selling nine times as many shares as they are buying right now. •In addition, some extraordinarily large bets have just been made that will only pay off if the financial markets in the U.S. crash by the end of April. •So what does all of this mean? [Could it be that they] have insider knowledge that a market crash is coming? Evaluate the evidence below and decide for yourself. Words: 570

19. This False Stock Market Bubble Will Burst, Major Banks Will Fail & the Financial System Will Implode! Here’s Why

economic-train-wreck

At some point we are going to see another wave of panic hit the financial markets like we saw back in 2008.  The false stock market bubble will burst, major banks will fail and the financial system will implode.  It could unfold something like this: Words: 660

20. Ignore Wall Street Cheerleaders: Market Technicals, Fundamentals & Other Info Says Otherwise!

investing2

[In spite of what] the typical Wall Street cheerleaders, I mean strategists, are predicting, we see the equity market ever more closer to its cyclical top, miners about to retest a major bottom and hard assets with a new catalyst. [This article analyzes 9 pieces of information, complete with charts, that show what is actually going on in the marketplace at this point in time and what the short-term future holds.] Words: 930; Charts: 8

21. 5 Sound Reasons Investors Would Be Better Off On the Sidelines Than In the Market

Investing financial markets

New year festivities have continued on the stock market even as the Christmas trees have been put away. The “death of the fiscal cliff,” not horrible job numbers and supportive comments from Mario Draghi on the other side of the pond have led to bold and bullish behaviors over the last three weeks. While no one can predict the exact peak, here are five reasons you’re better off on the sidelines than in the market.

22. These Charts Suggest a Possible +/-60% Decline in the S&P 500 by 2014

Investing financial markets

J.P. Morgan Asset Management has developed a chart showing the past two cycles in the S&P 500 highlighting peak and trough valuations. At face value it is very alarming as it suggests a potential decline of somewhere in the vicinity of 60% over the next year or two and concurs with previous innovative trend analyses included in this article. Charts: 4

investing3

Based on the latest S&P 500 monthly data, [my analyses indicate that] the  market is overvalued somewhere in the range of 33% to 51%,  depending on which of 4  indicators I used. This is an increase over the previous month’s 31% to 48% range. [Let me explain the details.] Words: 475

24. Goldman Sachs’ Leading Indicators Signal Steep Market Crash Ahead

Capture(74)

Goldman Sachs reports their Global Economic Indicators (GLI) show the world has re-entered a contraction and…is predicting a market crash worse than that of the early 90′s recession and one slightly less than the sell-off at the turn of the millennium. [Below are graphs to support their contentions.] Words: 250

25. Will a Black Swan Event Cause the S&P 500 to Drop by 40%?

Mark Spitznagel…warned the other day that the S&P 500 could lose 40% of its value in the next couple of years. So what black swan event could cause the S&P 500 to drop down to 760? [Let’s take a closer look.] Words: 856