The Federal Reserve Bank of San Francisco (FRBSF) says high PEs are justified by current macroeconomic conditions. Expected annual REAL total return on the S&P500: 2,97% for 10y, courtesy of the forthcoming "Tax and Jobs Act". Does the bond market agree? Maybe, if the S&P500 risk premium over Gov. bonds has fallen. Alternatively, the risk premium is as high as ever, the bond market disagrees with the FRBSF, and is telling us the S&P could be 17% overvalued. (Or is the bond market undervalued and doesn't know it?).
---------- Post added at 05:03 PM ---------- Previous post was at 04:56 PM ----------
The debate on stocks overvaluation
In a recent article I made the case that US stocks were only mildly overvalued: "no speculative bubble" yet. Thus, they could go much higher, if they overshoot (which is not unusual): "buy the dip" on small (2%) pullbacks is the best trading strategy as long as the uptrend is intact. However, it is not likely that stocks will rise way above their fair value: irrational bubbles are infrequent, even less so as the memory of 2008 still lingers. That's why it is important to determine what their fair value is (what I try to do more precisely in this article): it would be prudent to "sell the spikes" and ****ually increase the average amount of cash in hand as the market rises above.