As markets are closed, investors are getting ready to move their money to other asset classes, but as of right now the market appears to be largely priced in by equities, which are largely the largest and most liquid of the options.
As we know, the value of stocks is at an all-time high, but if the market’s price-to-earnings ratio were to remain at the current level for the next few years, the index would be worth nearly twice what it is today.
But the market may not be pricing in the future.
On Wednesday, the Dow Jones Industrial Average fell 3.8% to 26,723, and the S&P 500 dropped 2.1% to 2,828.
The NASDAQ composite index also slipped, but it’s a little higher, as its price-earning ratio is up 1.5 percentage points to a record.
So, even though the stock market is the most liquid asset class, it’s still a little less liquid than the housing market, which is also a big part of why we think the housing markets are undervalued.
In short, the market isn’t pricing in a long-term return for stocks, and we suspect the price-performance ratio will continue to increase in the years ahead.
For example, the S/E ratio for the S & P 500, which represents the benchmark stock market, is currently at 4.9, meaning that it’s currently outperforming the broader market, and that will only increase.
Meanwhile, the yield on the 10-year Treasury note is at 1.2%, and the yield for the 3-year treasury note is 1.4%.
These are all high-yield assets, so if the markets continue to be overvalued, these two assets will be a lot less liquid for investors.
Investors are also taking advantage of the fact that the government is spending billions of dollars to bail out the banks.
That’s helped the S, P and 3-month Treasury notes outperform the broader markets, so investors are now willing to pay a lot more for these assets.
These aren’t all cheap investments, but they are generally much cheaper than the stocks and bonds that the market has priced in for the foreseeable future.