Uncovering Opportunities in a Tumultuous Market

by Christine Benz

The current market environment is a head-scratcher on a number of fronts.

Despite a little spackle here and there, Europe still doesn’t appear to be on the mend, and the specter of slowing growth looms large across the globe.

Perhaps even more worrisome, given that low valuations are a better predictor of market performance than growth in GDP (gross domestic product), is that stocks in aggregate don’t appear to be a screaming buy right now. The price-earnings ratio for the S&P 500 index was a not-unreasonable 16 as of early August 2012, putting it in line with historical averages. But the so-called Shiller price-earnings ratio, which attempts to smooth out effects of business cycles, is 22. That’s a bit worrisome when you consider that the long-term mean of the Shiller price-earnings ratio is 17. U.S. stocks have gained about 14% on an annualized basis over the past three years, so it’s probably not surprising that stocks look fairly valued, if not downright overvalued, right now.

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Christine Benz is director of personal finance for Morningstar and senior columnist for Morningstar.com. She is a frequent speaker at AAII Investor Conferences and Local Chapter meetings.


Edward Kaminski from Indiana posted about 1 year ago:

A very good analysis of the current market situation with specific recommendations for each analytical point of view.

James Jennings from Virginia posted about 1 year ago:

Morningstar is very conservative. You may not make very much with their 5 star stocks, but you will not lose very much either. Long live CAPM and MPT.

John Thumann from Arizona posted about 1 year ago:

Is there any foreign withholding tax on dividends paid by France Telecom SA ADR (FTE) and NTT DoCoMo ,Inc ADR (DCM)?
This is a very interesting article and the discount-to-fair value and moat concepts make a lot of sense.

Betty Anderson from Oregon posted about 1 year ago:

Helpful analysis of the market situation and the comparisons seem good.

Graham Johnson from California posted about 1 year ago:

What about bonds? I do not go to meetings or read your trash anymore because all it is is stocks and ETF (same thing). I am 79 aqnd need safety not stocks with losses I have no time to make up. You have abandoned your longtime members.

Timothy Gorham from Rhode Island posted about 1 year ago:

Well done by Ms. Benz who is obviously someone who does her homework. However, it is nearly impossible for anyone to give investment advice until we get through the November elections. In the interim I'd keep my powder dry because no one can predict the market reaction. I'd agree that the pure yield play is a crowded trade without much upside... buy high and enjoy the dividends I guess.

John Mcdonald from Georgia posted about 1 year ago:

Buy NRFHF around 370,hold for 18to 24 months sell around 450. John H.McDonald 404-606-0646

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