How cheap or expensive are stocks? This is one of the more interesting investing debates, and a very confusing question for institutions and individuals alike. It often leads to fear, paralysis or bad decision-making, or some combination of the three.
I was reminded of this recently courtesy of a Wall Street Journal article with the headline "What to Buy When Nothing Is Cheap?," discussing a dilemma facing large pension funds. The implied question is how much risk should investors tolerate when everything seems to be overvalued. That's a premise loaded with implications that must be unpacked before you can get to the primary question of valuations and what (or whether) to buy.
Let’s start by saying that not everything is overvalued. European stocks are certainly cheaper than U.S. stos; emerging markets are cheaper still. The Journal noted that the California Public Employees' Retirement System, the largest U.S. public pension fund, had internally discussed selling $50 billion of stocks last year; but after thinking things over, it ended up buying more instead. But this offers no satisfying answer to the flip side of the question posed by that headline: Is everything overvalued?
Source: Bloomberg