Are Equities Undervalued?
It may seem that the U.S. stock market is overvalued, if you look at how far we have gone since the bottom, but that is not the whole story.
As rates are kept at record low levels, investors are becoming worried of the fact that inflation will occur and not timidly. This will cause excessive risk taking upon financial institutions, which was a large factor in the housing market crash. With this taken into consideration, compared to the average S&P 500 corporate bonds yield which is at 5%, the S&P 500 companies common stock earnings is yielding at 7%. This is showing that many companies are forecasting much better number than there stock is indicating.
Greece's sovereign debt and China's monetary tightening have been key financial events lately that have hurt equities. These events and others have caused the dollar to rise substantially while the Euro has plummeted into turmoil.
Many investor believe that the IMF will not allow a collapse of the EU, and stop the spread of the sovereign debt issue, and these investors are purchasing U.S. equities on these dips while the majority have been running away. China has been weighing on commodities as well causing prices of raw materials such as copper to rise, while the U.S. Dollar to rise. This is at largely due to the tightening of lending in China. Extraordinary events have occurred as well such as the oil spill, which has partly caused Crude Oil prices to drop.
While all of this has occurred, the U.S. has recently achieved strong jobs reports and GDP growth.
Strong economic data in many sectors have been reported, yet equities are still predominantly low. This has allowed investors to place money into the U.S. while the EU is trying to fix problems in Europe.
Europe and the rest of the world's problems are key to keeping the interest rates at 0% longer. While equities seem expensive to some, there are many problems to be solved around, and as problems are solved there is a lot of room to grow.