Are equities overvalued?

By joefriday, November 11, 2013

This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.

Dear Travis,
Yes, I know, your answer – or your question to my question – is which equities? But there has been no shortage of commentary by some fairly astute people – Robert Shiller, for example, who has won this year’s Nobel Prize in Economics – stating in no uncertain terms that U.S. equities are overvalued. Shiller’s contentions, simply stated, is that rather than calculating P/Es on the basis of 12-month trailing earnings it makes sense to look at average inflation-adjusted earnings over the past 10 years: this smooths out distortions from the business cycle and also captures more accurately the intuitively obvious notion that most things, including corporate earnings, tend to revert to the mean over the medium to long term. Using Shiller’s calculation, the current P/E of the S&P 500 is 24.5 (versus a current ”normal” P/E of 19), and that this is nearly 50% higher than its historical mean over the past century or so of 16.5

So two questions for you: 1) do you agree with this thesis? and, 2) if so, what does it mean in terms of rebalancing one’s portfolio in the direction of non-US (and probably non European) stocks?

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