The markets are down, but are they down enough?

The DOW ended down 12.4% for the week, the S&P 500 down 11.5%, and the Nasdaq down 10.5%. This means all three indices are in correction territory, and for the Nasdaq and S&P, these are the largest drops since the 2008 crisis. All that money has to go somewhere, and it’s been going to U.S. 10-year Treasury notes, which, as a result, are now at a record low for yield. Similar patterns emerged around the world, with Stoxx Europe 600 down around 12% and the Nikkei down 9.6%. These seem like big drops, and they seem to be in reaction to CoVid-19 scares, but it’s not at all clear that the market has dropped “enough”. The Nasdaq usually trades at a PE between 17 and 20. Even after it’s largest weekly drop since the crisis, it’s trading at 22.15. Similarly, the S&P 500 is usually between 15 and 20, and is currently at 22.23. At these multiples, it appears to me that the markets think companies will continue to have above average performance over the next 5–10 years, even in the face of the virus outbreak. Certainly, there are buying opportunities to be had, but the broader markets still look overvalued to me.

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Chris Richardson has strong opinions on just about everything. Just ask.