Uncovering Opportunities in a Tumultuous Market
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.
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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.
Yet, as in nearly every market environment, opportunities lurk for investors who are willing to roll up their sleeves and look for them. While a handful of market segments look notably expensive right now—dividend-rich areas like real estate and utilities seem particularly frothy—a number of market segments appear to be trading cheaply, based on Morningstar analysts’ bottom-up research. That not only presents opportunities for individual stock investors, but also translates into investment ideas for mutual fund and exchange-traded fund investors as well.
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