If you’re an investor, mispriced assets should make you happy. When stocks are too low, it’s exciting (Buy!). When stocks are too high, it’s exciting (Sell! or Sell short!). But when an asset is priced just right, you’re left twiddling your thumbs or, worse, trying to find reasons to buy or sell anyway.
On Thursday, the S&P 500 marched tantalizingly close to 1,000 for the first time since November. But to many investors, all the recent good news has made the investing climate decidedly boring.
In a recent commentary (the S&P was at 950), GMO’s Jeremy Grantham wrote that stocks and other assets “have all — or almost all — converged for a few unusual moments at fair value…It’s difficult to be inspired.” When I spoke yesterday with Mark Freeman, a portfolio manager at Westwood Management, he struggled to point to asset classes that investors could turn to for easy profits. “A lot of the market’s mispricing has been taken out in the rally,” he lamented.
Admittedly, some investors still feel strongly that the market’s not going to hang around 1,000 for long. PIMCO’s Bill Gross wrote today that the U.S. economy risks a permanently higher employment rate which would dampen stock prices. At the other end of the spectrum, Legg Mason’s Bill Miller says, “I think bargains abound in the U.S. stock market.” In March, keep in mind that nearly all of these guys agreed that the stock market looked attractive. If nothing else, we’ve lost that consensus.
At 1,000, the market’s price/earnings ratio based on 10-year normalized earnings (which smooths out earnings bubbles and busts) stood at 17 — nowhere near its highs in 2006, but already above its historic average of about 16. Historically, when you’ve bought stocks at this level, the annualized return over the next 10 years has been about 6%. That’s not bad, but it’s not particularly exciting either.
So what can you do? For one, if you wisely decided to boost your equity stake a few months ago, as we recommended in February, now’s a good time to go back to your standard allocation. If you don’t know what that should be, use our Asset Allocation wizard. Don’t go too far and make a bet that the stock market’s going to drop to new lows. With the market floating at a price that’s about fair, about the only thing that we can be sure of is…well…nothing.