Stocks Are Not Currently Discounted

Every time there’s a significant stock market decline, headlines proclaiming stocks for sale quickly follow suit.

Investors sometimes liken investing to retail “door-buster” sales – “Buy now, our prices are so low it is incomprehensible!”.

But in reality, we really have no idea where stock prices will head from here. Even after recent market declines of about 10%, CAPE (Shiller PE ratio) still sits at an extremely lofty 31.69; nearly double what was historically mean (16.83) or median (16.15).

Aside from Black Tuesday (which triggered the Great Depression in 1929) and the dot com bubble of 1999, our current market valuation remains just shy of its all-time peak valuation in history. Could this become our new normal or will we revert?

Are stocks on sale? Absolutely not; everything depends on context. Stocks might be more affordable now than two weeks ago, but they remain more costly compared to past periods such as three months, one year, five years or historic ones (excepting only two). It will take 20, 30, 50 years from now before we know whether this dip was an advantageous buying opportunity or not.

Returning to our door-buster example. Imagine that I am selling you an exclusive mattress. Over eight years, my prices have steadily outstripped inflation while at the same time becoming slightly cheaper right before holidays – you may or may not get a great sale depending on my future pricing decisions; therefore it is difficult to predict them accurately.

Allow’s take a quick glance at Bitcoin’s price as we continue our analysis. Recently, its price reached near $20000 per coin; since then it has hovered between $7,000-$8000, gradually declining and cheaper than two months ago but higher than six and twelve months ago; although that does not indicate that a sale has taken place – two legitimate economists who just provided valid arguments why the coin should be valued at $20 should probably disagree; we shall just have to see what the herd decides is an appropriate price point from here on out!

As much as these limited-time sale claims concern me, their other major drawback is how they encourage market timing. To “get in on the sale”, one must assume you’ve been building up cash on the sidelines, waiting for an “opportunity to buy”, aka “timing the market”. Had this logic applied over a 10-year span instead of late 2008 through August 2015 alone, then significant market gains would have been missed along with dividends on new income that could have been invested throughout.

Where will stocks go from here? Nobody really knows. Valuations could revert back toward median/mean levels or we could begin another period with valuations remaining above 30+ range. Given our inability to predict the future, it’s crucial that investors view dips like these as irrelevant to an overall methodically consistent continued accumulation investment strategy (preferably passive index investments) – rather, view them as just another day!