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When Are Stocks Too Expensive?

The US stock market has made double digit advances now for three years. This is its best performance since the 1990s before the dot com bubble. With previous rallies and crashes in mind, when are stocks too expensive? This question was posed in a CNN Money article, Are Stocks Too Expensive? They look at P/E ratios which are a little high and the Schiller P/E ratio which is very high. And they look at the economy.

But there are two other key factors to think about when judging stock prices: First, how fast is the economy growing and second, is the Federal Reserve likely to make a mess? Optimists admit that U.S. stocks aren’t cheap right now, but they see that shares are pushing higher for a logical reason: American companies and the economy are clearly expanding. The latest corporate earnings came in strong despite headwinds from Europe, Ebola and ISIS, among others. All 10 S&P 500 sectors are growing and about 75% of companies beat expectations.

To the extent that stock prices are a predictor of the financial future, stock investors expect to see the economy continue to go up. In this light when are stocks too expensive? At current prices that would be when the economy starts to flatten out and head for a recession. When Are Energy Stocks Too Expensive The oil and natural gas fracking boom is a modern day miracle. Gas prices are down and it costs less to heat your home. But, it would seem that no good deed goes unpunished! Excess production has driven down the prices of oil and natural gas and hit hard at energy stocks. But, it would appear that the much dreaded correction has happened in energy stocks. When these stocks would be too expensive now would be if a recession threatened. The PE Fund Marketplace newsletter quotes a J.P. Morgan analysis indicating that energy stocks may have bottomed out despite low prices.

Needless to say, one group that has underperformed as the stock market racks up new highs is the energy sector. For investors looking to stay long the stock market, one of the best places to look may be this sector. A new report from the analysts at J.P. Morgan says that exploration and production stocks, which have been absolutely hammered, may have bottomed, even if the price of oil hasn’t yet.

Again the stock market tends to predict the economy, market sectors and individual stocks. The thinking in the article we reference is that all possible bad news has been discounted in the oil and gas exploration sector. Land of the Rising Sun and Stocks Too? Japan has spent the last two decades fighting deflation. Many Japanese companies are hoarding cash and provide little return on invested equity. This may soon come to a halt according to an article in the Financial Times. A boost to Japanese stock returns may be the result of selective investing by the mammoth Japanese government pension investment fund.

Last month Mizuho Securities drew up what can only be described as a hit list. There are 44 public companies in Japan, the broker said, with sub-5 per cent returns on equity for five straight years and enough foreign shareholders to stir some kind of rebellion. As such, the companies’ presidents look vulnerable to protests, Mizuho said, noting that the administration of Shinzo Abe has not been shy about applying pressure for better stock returns via the vast Government Pension Investment Fund.

Some of the companies are already taking action and promising stock buy backs and increased dividends in response the thinly veiled government threats. This internal play in Japan could lead to nice profits in anyone wants to pay attention and invest appropriately.

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