Commentary on the Stock Market

Posted on Posted in Overall Stock Market

I don’t discuss the overall stock market much on this site. There are plenty of other commentators and analysts out there that do, and so I don’t feel I will add much value to my readers by discussing what the S&P is doing. The other reason I don’t discuss the stock market much is that I feel that it doesn’t benefit my own investing much either… I also don’t think that it does much good to think about what the overall market is doing now or what it might do in the near future.

Over time, I believe that American stocks in general will go higher. I have a very rough idea of where the overall market should be valued at, but this is very rough and I don’t put much weight into whether I think the market is over or under valued. I just look at stocks and the businesses they represent each day.

I said this a few months ago… this is not a prediction, just an evaluation (read: wild guess) that may or may not be way off… ┬ábut I’ll say that I think at these levels, the market is likely to return maybe 4-6% per year over the next 10 years or so.

I base this on how the market has responded in the long term to various valuations over the last 100 years. I have a market valuation spreadsheet where I track things like corporate earnings, returns on capital, S&P book values, overall dividends, etc… I also track the overall market cap and track the “Buffett ratio“… Buffett said his favorite way to value the stock market is to take the overall stock market cap and divide it by GNP… this is essentially a Price to Sales (P/S) ratio for the entire market. These general metrics seem to tell me that the market is fairly to slightly over valued at these levels… not cheap, but not dramatically overvalued as some might say, at least not in my opinion. But don’t take this to the bank, and more importantly: I have no idea where the market goes in the near term.

Use Peter Lynch’s Strategy to Analyze the Overall Market

So I like to track a few data points on the overall market, but I only update these things once a quarter, and really spend about 30 minutes a quarter looking at it and thinking about it. (By the way, that’s about an hour and 45 minutes more than Peter Lynch’s maximum of 15 minutes per year that he gives himself to consider the overall market/economy).

Keep a Watchlist-Let Mr. Market Present You Offers

But a day like today is always interesting because the watchlist lights up with all sorts of red and green (I programmed my google spreadsheet watchlist to light up red when a stock is down 1% or more, and green for things like P/E under 10, within 10% of the 52 week low, book value under 1, etc…). I don’t check CNBC in the morning to see what futures are doing, and I don’t often check the news until later in the day. So today I didn’t even notice the selloff until I noticed my spreadsheet list had a lot of red on it.

Today is also interesting because numerous asset classes that often times move in opposite directions are all down today. Stocks, treasuries, gold, oil... all getting crushed today. I don’t look at the VIX much either, but I noticed today that it popped above 20 for the first time this calendar year.

The market is still near all time highs, but things get a bit more interesting when volatility increases. US stocks collectively lost about $425 billion of value today. That of course is value as measured by stock prices, not intrinsic value of the businesses themselves. That is where the opportunity comes in for value investors. Whatever you might be interested in, chances are it got a bit cheaper over the last few days.

That’s the beautiful thing about Mr. Market. He has a new offer (or bid) for you each day.

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