Are Stocks Overvalued?

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In a prior article, we discussed the recent stock market downturn. Since then, the stock market has recovered much of what it lost. But the effects still linger from the massive sell-offs, which started in mid-August and persisted through until month-end. Given the extent of their impact, it certainly begs the question of whether stocks are still currently overvalued – and what effects this might have in the future.

The Current Stock Markets Situation

The flurry of global stock sell-offs stemmed from concerns about the Chinese economy and when the Fed might raise interest rates. A strong drop in Chinese manufacturing and the surprising devaluation of the Chinese yuan were primary strong contributors to these global investor fears.

Going into September, the S&P 500 index finished down at 6.3% -- its worst results since May 2012. Likewise, the Dow Jones Industrial Average had an overall monthly decline of 6.4% -- its worst monthly performance since May 2010. Furthermore, the NASDAQ fell 6.9% for August on the whole.

Despite the lackluster U.S. market performance, Chinese stocks remain strong. After enjoying a record long bull market, which ended in June, the Shanghai Composite index fell 39% from June through August. Even after sustaining the effects of a $4.9 trillion high-volume sell-off, shares in China’s mainland exchanges still are over 200% more expensive than their counterparts in Hong Kong. In fact, dual-listed companies traded at an average premium of 115% at August’s month-end.

What’s the Takeaway?

Chinese economic slowdown clearly had an impact on global financial markets. It’s also expected the Fed may raise interest rates at its next meeting in mid-September. These variables may continue to exert downward pressure on U.S. stocks in the future.

As a speculative marketplace, the stock market is more prone to ebbs and flows – or even more severe fluctuations – than other markets. Some financial experts have said this is the start of an even bigger market downturn. Consider this:

• Looking at data showing how risky stocks were in 1929 and 1999, Andrew Smithers, chairman of Smithers & Co., says stocks are overvalued 80%
• James Dale Davidson, an expert with a history of predicting major economic shifts before they happened, believes there could be a market downturn of 50%
• Davidson says now may be a good time to reevaluate how much of your portfolio is allocated in stock investments

Opinions can vary, but this isn’t the first time experts have recently asked if stocks are overvalued. Even since the beginning of 2015, different commentators were questioning if stock valuations would prove to be greater than future earnings potential.

What are Alternatives to Stocks?

For American retirees and workers approaching retirement, there are “Safe Money Alternatives.” Many investors have found answers in financial vehicles such as fixed index annuities, which offer principal protection, safety from the effects of market downturns, and some growth potential. A fixed index annuity may also offer lifetime income benefits.

If you’re interested in learning more about this financial vehicle, can help you. Or you're keen on seeing if it makes sense to put contractual guarantees from annuities or other insurance products in your portfolio, we can help you too.

Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

Author: Super User

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