Don’t panic: Stocks are attractively priced

Author: Sreeni Meka

Covestor model: Long-Term Value

Financial markets have been erratic since end of the April. As market gurus love to say “sell in May and go away.” It rhymes well. Unfortunately, markets rarely work that way. If everyone is going to sell in May, are you going to wait until May?

There’s no doubt in my mind, the US market is well-integrated with global markets and we may inherit some of the global risks associated with European markets. However in my view, such fears are overblown.

As of early June, the S&P 500 earnings yield is 6.67% versus a 10-year bond yield of 1.6%. The fact that market earnings are over four times higher than 10-year Treasuries implies the stock market is relatively cheaper and has upside potential going forward.

Sometimes it is very hard to comprehend market behavior, and market participants love to chase overvalued, well-hyped sectors and tend to ignore low-valued ones.

In recent history, most of us collectively followed Internet stocks in the late nineties and home builders until the mid 2000’s and now it’s gold and other precious metals. The market is often myopic and lacks a long term view.

When market is at the peak, you hear lot of noise and euphoric talk. When the market is trading at lows, investors are fearful. Remember in late 1990s when it was so common to talk about e-stocks and dot com companies and how your friends doubled their money in few clicks on the web? That was the clear sign of a market peak.

There was the same kind of over-enthusiasm in the mid-2000’s when realtors with high school diplomas talked about American economy and housing market and how quickly they made money by flipping few properties. That was clear sign of housing bubble.

Nowadays, you see hundreds of signs at every street corner saying,”We buy Gold.” There are also commercials talking how inflation is going to bite us and how dollar going to collapse. I don’t know how long this gold boom is going to last.

As mentioned in my earlier letters, equities are trading well below their fair values. It is the time to invest in American companies with excellent earnings potential and trading at meaningful prices, rather than running away from the market.