Is The Stock Market Dirt Cheap Or A Bubble?

@WarrenBuffett asserted earlier this year that stocks are " #dirtcheap " if interest rates stay low. Earnings yields on stocks are still way above bond yields. There is reason to believe that #lowinterest rates could stay in place for years or even decades, as evidenced by Japan's experience. Demographic and structural factors may hold back inflation and growth that would justify a rate hike. Stocks probably are not in a #bubble, although investors should stay away from certain pockets of irrational exuberance. Although not all professional investors and analysts think that stock market valuations are in bubble territory, most would probably agree that U.S. businesses are at least fully valued. By almost any measure, the P/E ratio for the S&P 500 is at a historically high level. Looking at a chart that tracks the market's P/E over time, it would appear as though the current bull market is on par with the late-1990s tech bubble and the mid-2000s housing bubble.  Interest Rates One notable optimist, though, is none other than Warren Buffett. Indeed, the Oracle of Omaha stated earlier this year that stocks could be "dirt cheap" if interest rates stay low. For many investors, it all comes back to opportunity cost. Back when I was born, the 10-year Treasury yielded about 6.5 percent, but today the same U.S. government bonds yield just 2.3 percent. When inflation is factored in, real interest rates are still very close to zero. Although the P/E for the S&P 500 now sits above 25, the resulting earnings yield of about 4 percent makes owning stocks decisively more attractive than holding bonds. Even with the current Shiller P/E of 31, which adjusts for cyclicality, stocks still yield nearly 50 percent more than U.S. Treasuries. Because U.S. government bonds are a virtually risk-free investment, it makes no sense at all to hold an asset with a lesser expected return. At the height of the tech bubble in 2000, though, the yield on Treasury securities eclipsed the S&P 500's earnings yield by a wide margin. With bonds yielding more than 6 percent and stocks at just over 3 percent, a rational person would have easily seen that the market was descending into madness. There has been a lot of talk about mean reversion as it relates to interest rates and stock valuation. If the Fed were to raise rates significantly, then of course the market would be overpriced. That may yet happen, but there is reason to believe that historically low interest rates could stick around for a long time.

https://seekingalpha.com/article/4114062-stock-market-dirt-cheap-bubble