Ａｒｅ　ｙｏｕ　ｂａｓｉｎｇ　ｔｈａｔ　ｏｎ　ｅａｒｎｉｎｇｓ　ｒｅｐｏｒｔｓ，　ｏｖｅｒａｌｌ　ｅｃｏｎｏｍｉｃ　ｍｏｏｄ，　ｇｏｖｅｒｎｍｅｎｔ　ｎｕｍｂｅｒｓ，ｏｒ　？？？
Stocks are fairly to slightly undervalued right now. Depends on sector. I am basing my current comments on free cash flow measures. Coke and Pepsi are overvalued while PG, JNJ, USG and a handful of others are undervalued. Most stocks I look at are just about fairly valued right now. Others, undervalued. There are opportunities but not as many as 1 year ago. Earnings are not a good measure of a business but people don't believe it. Free cash flow is somewhat like looking at CD yields granted that is an oversimplification. Anyways, I see some upside to the S&P 500 since most stocks are properly or under valued. I rarely find stocks today that are obviously overvalued.
As for the future, I don't think people realize what is going to happen. Well, I do. Right now, public debt relative to GDP is to high. There are several ways to fix this. But let me limit what I have to say to the following. We are going to print money which does not take an act of congress even though it is actually a tax on US citizens. This is going to cause inflation and as a result of this, GDP will increase. By doing this, the old debt will stay where it was but GDP will increase, making it easier for us to reduce the difficulty in repaying the public debt. How much inflation? Well, let's just say 2 years of double digit inflation numbers is what I expect. I wouldn’t be surprised to see inflation at 50% over the next 5 years. When will this start? I don’t know. No one knows. All that one can conclude is a long term picture. If you are short term oriented though, think about the recent GDP numbers.
That essentially means that everything is going to inflate. A rising tide raises all boats after all. And in the end, you will see a lot of prices for goods going up. This doesn’t matter to companies. They will just increase prices with the tide which will increase revenues, earnings and free cash flow.
Actually, my current thoughts on valuation do not include crazy inflation. It is somewhat of a catalyst. If inflation is considered almost all stocks are undervalued right now. But the point of this is that the rising tide will raise stock prices to since the tide effects the measures that people care about (revenues, EPS, FF, etc). If the Dow should be at 11,000-12,000 right now, one might as well expect it to be 50% higher in 5 years time. How quickly it gets there is beyond my and anyone else’s capabilities. Anyone that does have an answer does so simply because they were asked.
So, these fearful people getting 2% on their CDs are going to loose a lot of buying power when inflation hits. The ones that think properly are going to make out like bandits relative to the general population. When will stock prices rise? No one can answer that. It is an issue of when though, not if.