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Hi everyone….. Seems a day hasn’t gone by this path month where someone doesn’t ask me, think its a good time to buy into the stock market now? I mean a market that dropped 30% seems like it’s a good bargain, right? Well….let’s do a little homework on that and see what you think. I like to start with a couple of indicators. I’ve shown these before in previus vidos cause they do a good job of looking at the market from a 30,000 foot view. One is Shiller PE ratio. I like this because it’s an inflation adjusted S&P 500 index. Price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio) I won’t go too deep there, but what we want to do is look at the overall index and have a quick look to see if it’s over or under valued. The PE ratio as of today is sitting at 26.14. To understand what that is telling us we need to know a couple of things. What is the median for this ratio – in other words over the past century, what has the average? The Mean is 16.7 – just for clarification, the MEAN is what we’d typically call the average, it’s adding up all the numbers and divide by how many numbers you added up. If you added up 10 random numbers, 5, 12, 17, 2 etc, then added all those numbers together, then divided by 10, you’d get an average of those numbers. That gives us a MEAN. So 16.7 is the mean. Then there is the Median which is 15.77 – The "median" is the "middle" value in the list of numbers in numerical order, finding the middle number. So taking those same 10 numbers as an example, put them in numerical order, 2,5,9,12,18 etc…then you find the middle number between them all to get the MEDIAN. Then you can see that lowest the indicator has ever been was in 1920, at 4.78 And the maximum ratio was hit in 1999 at the peak of the dot com boom and bust at 44.19 So, looking at the current graph again, we see we are still significantly above the mean or the average. For some perspective, we were about 29 on this indicator before the recent Corona Virus crash. We dropped 30%, it came back up a bit, and now we’re down about 20% from the highs, and that dropped the indicator about 3 points to its current level of 26. Another chart to quickly take look at is the GDP to Market Indicator. There is a lot of story to this chart and we’ll have to get into one day, but the basic idea here is to see if the market is overvalued or undervalued based on GDP. GDP is gross domestic product which is basically the entire economy. It’s all the production of the whole country. Since the stock market is essentially based on the economy, we want to see if the market is high or low in value as it relates to GDP. Bottom line is – This graph suggests we are still paying more for stocks than they will produce. Our total output is just over 20 trillion, and we are paying over 30 trillion for that output if you were to buy the Total Market Wilshire Index. This means we are paying 129% of GDP when buying into the Wilshire index. That quickly tells us that at the current price, even after the 20% drop, still may not be a good value. As it stands now the rate of return on stocks would be about 0.1% and this includes the 2.7% projected dividends. When looking at both of these graphs what seem apparent is that even though we had a 30% drop and now hovering at a 20% loss for the year. And our rate of return of a 10th of 1% is hardly worth the risk. We seem to still be overvalued. You know, I noticed this when we hit that 30% mark. I had read a bunch of FB posts and saw some YT videos saying, wow this is a good time to get in, a 30% drop! You can see from this 5-year chart how we pretty much jumped off a cliff. The low for this mini-crash hit on March 20th when the Dow went from over 29,000 down to 19,173. A 30% whack in just a few weeks. You might ask, when was the last time the DOW was at this level? You have to go back to Dec 2, 2016. In other words, if you bought at the low of the crash, and assuming you bought into the DOW, you would be buying at 2016 prices. Seem like a good deal, right? Well might be, who knows, depends on when or if we get back to where we were, and how long it takes to get there. If we look at the Shiller p/e back then, we were right at about 22 - 24 on the indicator, still high valuation of the mean of 16 and higher than today’s indicator at 20. In other words, back in 2016 to get 1.00 of earrings people were paying 22-24 dollars. If there was no growth and you got the 1.00 every year per share, it would take you 22 years to get your money back. Today, after the market drop its still indicating it would take 20 years to get your money back. Most investors who are willing to take the risk of the stock market like to get their money back or payback in 7 years or less. That’s about a 10% rate of return. Now not all return comes just from the revenues or dividends. It can come from growth too. Both play an important factor in determining what price a stock is worth paying. So, one could say that even buying in 2016, wasn’t that great of a bargain either. In fact, I found it hard back then to find really good values in companies I’m interested in owning. If you did not buy back then, for the last 4 years you might think how dumb you were for not buying in 2016 as the market continued to rise. Then in one fell swoop of a germ nearly 4 years of growth was wiped out. 4 years wasted, back to where you were. We call those compounding periods, and missing out on even one of them can be a huge difference in your wealth. Well, with a little recovery, we will see where we go from here….. Today, is April 22nd, the DOW is at 23,445. The last time we were at these levels was, Oct 27 or 2017. So, if you had invested back in Oct of 2017, you would have rode a wave of growth up for just over 2 years or about 27 months, and again, you’re right back to where you started. Now let me get get to the original question. Is the market a good buy right now? Based on everything we’ve looked at, and with a projected growth rate of 0.1% it doesn’t seem to poised for great returns. We were due for some sort of correction anyway, but maybe this virus hasn’t pushed a correction far enough. Now look, I love a good economy, that last thing I want to do is see a market crash and a depression. I’m merely pointing out that the market as a whole, as an index, isn’t necessarily a good buy right now. That doesn’t mean individual stock companies that have suffered a great deal more, might not be good buys. The question is the recovery time for some of these companies and all the unknows. For Instance, travel, you’ve got airlines, hotels, and cruise ships all really taking a beating. Airlines are off 50% or more. Delta last year at this time was trading at 58 and now it’s at 22 and a half Is that a good value, a bargain? It’s all about recovery time. What we don’t know is how much travel will be affected. What about the possibly of fewer flights, empty seats, not being able to fill planes to capacity for social distancing? I mean we have a lot of unknowns. Royal Caribbean a year ago was 122, now it’s just above 34. Seems like a bargain. Until we see the revenues coming in, we have no idea if this is a bargain or if it needs to go down another 30% or more. What you can’t assume is just because a stock was 122, that it’s a bargain at 34. It may have been way overpriced at 122, and still could be at 34. We really don’t know until the cruise ships start cruising again. We are pretty certain that their revenue, earnings, and profit will be down significantly, and likely their debt up. Will it be months, days, or years, or will they ever recover? Great question, and until you have the answer, there is no way to evaluate what a good price for this company is. As a whole if you’re looking at the index, it’s still not a very good value. With that said, there may be some companies within the index that are looking good, have a clear path to growth and profitability, while others may not rebound as quickly or at all. If you think you want in, then please, do your homework! We’re seeing a lot chatter out there and guys trying do some day trading. But if you’re looking for value, Buffet style, as I like to call it, it’s still not easy. Buffet’s partner Charlie Munger did a recent interview and he basically said they aren’t doing much of anything right now. He said, “I think there are lots of troubles coming, One thing about Buffet and Munger is they like bargains. They like to buy wonderful companies on sale. Buffet was a buyer in Airlines a couple of years ago. Obviously, no one, not even the guru of investing, could have predicted this virus, However, he’s not selling them, and interestingly enough he’s not buying them either. If he’s going to hold a position, normally he would add more shares when the price hits his valuation mark. So, either he may not hold them, or they haven’t hit what he thinks is a good value right now. Again, they are hard to evaluate until we get going again can see revenue, and profit, the amount debt they will be carrying from this debacle and the kind of numbers that tell us if a company is going to make us any money or not. I think Buffet will keep them, until or unless the story changes, in other words, if why he bought them is still the story, then he’ll likely keep them and add to them at some point, when there is a way to make money on them again. Think about this, he has enough money sitting in cash that he could buy the four major airlines right now, but he’s not. I think he’s waiting this out. Munger said there is still trouble ahead. The other side to this, is they still might not be a bargain. Some have calculated that we need another 30-40% drop before we get into bargain territory. This is what I want to talk about on my next video – becaue just because something is cheap, compared to what it was last month, does not mean it’s a bargain. So….that’s it for this week…. Subscribe Questions Comments Take care