The Shiller PE ratio has been a pretty useful guide over the years as to whether the US sharemarket in general is over or undervalued. The above chart shows this statistic to the end of November where it has the value of 21.8. Compared to its historic average (16.4) the S&P500 is around 33% overvalued and compared to the 40 year average (19.2) is around 14% overvalued. There could be many arguments supporting the current price, such as the Fed’s quantitative easing part 2 (QE2)channelling significant cash into the market and the continuation of record low interest rates, weak US Dollar inviting foreign capital, etc., but that does not provide sufficient reason to suggest the S&P500 is good value.
The US economy will not be bouncing towards massive growth, it will be a slow and painful journey; the reason why QE2 exists is that deflation is the threat, not inflation as the consumer is struggling, the US Housing market and unemployment levels are not going to improve dramatically for quite some time. So buying a market with a high PE with the high potential of slow growth is fraught with danger.
Hopefully I’m wrong as many superannuation funds depend on a strong US sharemarket but personally I’m underweight this part of the global sharemarket as the downside risks appear high.
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