Sunday, November 3, 2013

Is the Market Overvalued?

Last week, Larry Fink, CEO of BlackRock, the world’s largest money manager with $4.1 trillion in assets, said, “we’ve seen real bubble-like markets again. We’ve had a huge increase in the equity market. We’ve seen corporate-debt spreads narrow dramatically”, “We have issues of an overzealous market again” and referencing the U.S. Federal Reserve stimulus efforts, he said, “It’s imperative that the Fed begins to taper.” 

In addition, Bill Gross, co-CIO at PIMCO, the world’s largest bond fund with $1.9 trillion in assets, said during a CNBC interview "All asset prices are bubbly, bond prices, stock prices" and addressing the Federal Reserve’s efforts, "to the extent that any of them can be sustained is the ultimate test in terms of tapering.” 

Investor Warren Buffett, during a September 10, 2013 CNBC interview, said stocks have "moved a long way" in the past five years, they seem "more of less fairly priced now" and "we don't find bargains around but we don't think things are way overvalued either. We're having a hard time finding things to buy." 

Note: in a December 10, 2001 Fortune Magazine interview, Warren Buffet highlighted a favorite market measure saying” the market value of all publicly traded securities as a percentage of the country’s business–that is, as a percentage of GNP… has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.” As of Friday, the value of U.S equities was slightly higher than recent GDP, suggesting that the U.S. equity market is slightly overvalued. 


With the investment landscape made up of many markets, asset classes and geographic regions; “is the market overvalued?” seems like too simplistic of a question. Today, investors are wondering 

  1. how will reduced stimulus efforts affect global markets
  2. are record high profit margins sustainable
  3. will technology continue to help drive profit growth and 
  4. will globalization trends remain stable
U.S. equities may be fairly valued, but seeking selected ideas at a company and stock level may provide opportunities. In addition, not all global markets are overvalued.  Patience, research, managing risk and hard work are critical for investment success.   

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