I know what you’re thinking…
“How could you even consider buying stocks, Steve? How can you STILL be bullish when stocks are so expensive?”
But I look at stocks differently…
I explained a bit about this last week in regards to the housing market. You can’t just look at price when it comes to housing. You have to look at value. It’s all about what you’re getting for your money.
The same is true when it comes to stocks. And right now, looking at value proves that stocks are CHEAP.
Let me explain…
As I explained for housing, price isn’t the only thing to consider. You have to look at affordability… which includes incomes and interest rates.
Today, I want to value stocks relative to interest rates. I want to look at stock market affordability.
I look at stock values relative to interest rates because all investing is relative…
If you could earn 20% interest at the bank, you would have zero incentive to invest in the stock market. But if the bank pays you zero percent, and stocks have averaged 8% a year over time, then you have an incentive to invest in stocks.
Investing is all relative… Investors make decisions every day, asking the one question that matters: “Which investment is best today, relative to the other investing choices today?”
So please take a look at the chart below. It’s my chart of stock market affordability, extending through the end of the last bear market in 2009.
Like housing affordability, I look at three things here: stock prices, stock earnings, and interest rates. Here’s what it looks like when you put it all together…
Just like our housing chart from last week, readings at the lower end of the chart mean the market is more affordable, and less expensive.
As you can see, my indicator shows that stocks were dangerously overpriced in 1987 – right before Black Monday hit on October 19. And you can also see that stocks were extremely overpriced at the peak of the dot-com bubble in 2000.
When were stocks the cheapest by this measure? After the collapse of Lehman Brothers, near the stock market bottom of 2009.
This means in hindsight, my stock market affordability indicator did a good job showing peaks in 1987 and 2000 and finding the last great stock market bottom.
So where do you think we are today, 10 years after the market bottom in 2009?
Wouldn’t you think – after 10 years of soaring stock prices – that stocks would no longer be affordable? Wouldn’t you think that stocks would be extremely expensive?
Well, take a look at this next chart. It’s the same as the one before, updated to the present…
Isn’t it crazy – after 10 years of soaring stock prices – that stocks are still cheap based on this measure?
You may not believe it… but I’m simply comparing the benchmark of interest rates (the 10-year U.S. Treasury yield) to the benchmark of stock valuations (the price-to-earnings ratio, or P/E ratio for short).
There’s a little more to it, of course. But for today, just know that relative to interest rates, stocks are a good deal. It’s easy to see why…
Interest rates have been low for the last decade as stocks soared. And they’ve crashed again recently.
Ten-year government Treasury bonds pay around 1.5% interest today. Once you account for inflation, those bonds will almost certainly lose money.
So that’s the main competition for stocks right now… government bonds that are sure to lose money.
It’s no competition at all, my friend. This is a big reason why I’ve continued to pound the table on buying stocks. And it’s why I’m incredibly bullish right now.
Tomorrow, I’ll dig deeper into this indicator and how it works. I think you’ll see that there’s no question about it… You really want to own stocks now.
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Source: Daily Wealth