History has demonstrated that stock valuations are highly subjective, and that markets can easily become significantly overvalued before a long-running Bull Market ends. This is cause for concern, as today’s stock markets continue to spring higher and higher.
Naturally, the market’s high valuation is a concern, but it’s my view that it’s been overvalued for about three years. Over that time period, the S&P 500 has gone up 30 percent. – David Ott, Partner, Acropolis Investment Management
This market is the second longest Bull Market of all time. Historically, the S&P 500’s mean P/E ratio is approximately 15. At the moment, it is in the mid-20’s. The last two times the S&P 500’s P/E ratio hit the mid to upper 20’s was in the late 1920’s and the late 1990’s. Investors who have done their investment research know very well what followed shortly after that.
This does not necessarily mean that the market will crash tomorrow. The past has also shown us that market valuations can continue to stretch for quite a period of time. Although at this point some money managers and advisers believe the markets are overdue for a pullback, many continue to believe it will emerge as a correction within the existing Bull market and not a crash. Many expect to see a 5% to 10% pullback in the stock market based on the current high yield spread.
Generally speaking, U.S. stocks are overvalued and International stocks are undervalued. With that being said, a globally diversified investment portfolio that includes 20% to 30% international assets will outperform the S&P 500 over the next three to five years. In fact, it is expected that a well-balanced portfolio with safe, income-generating investments will deliver steady returns over the next five to seven years.