©2016 Watch Guard Capital LLC.

Watch Guard Capital LLC (WGC) is a state Registered Investment Adviser in Arizona and Ohio.  WGC and our consultants may only transact business in states in which we are registered, or qualify for an exemption from registration.  All products and services are subject to terms and conditions of any applicable laws and are only available in jurisdictions where they may be lawfully offered.  Our website is limited to the dissemination of general information and should not be considered a solicitation to transact securities or to provide personalized investment advice via the Internet.  Copies of our background information and service and fee disclosures are available by clicking the following links:

ADV 1A | ADV 2A 

The opinions and information provided by third-parties on our site is not guaranteed and is for convenience only.  WGC makes all attempts to provide accurate, complete, and reliable information but reserves the right to alter, update, or delete content without notification.

Investments are not Federal Deposit Insurance Corporation (FDIC) insured. 
Investments are not bank guaranteed and may lose value.

Search

Overvalued Stock Market?

A common metric to evaluate investments is the Price to Earnings Ratio (PE Ratio). Imagine buying a company that makes $10,000 a year for $100,000. The PE Ratio would be 10 because a price of $100,000 divided by earnings of $10,000 is 10. If an investor paid $200,000 for the same company, the PE Ratio would be 20 and the possibility for overpayment would have increased. On a historic basis, the stock market (S&P 500®) trades at 15 to 17 times earnings. The fact that the stock market now trades at 25.75 times earnings implies market optimism and an expectation that earnings will increase, corporate costs will decrease, future tax codes will be more favorable, or some combination of positive changes that supports the third highest PE Ratio in 157 years. So is the stock market overvalued? If you are concerned with this question you haven’t thought out your investing strategy enough, are too exposed to the stock market, or improperly hedged to weather the storm. Maybe the optimism is well-founded, maybe next year the market will be flat and earnings will catch up to the recent price appreciation, or maybe the market will revert back to 17 times earnings and drop 41.74%. In the end, a consistent investment strategy is more important than an opinion and building a portfolio with optionable investments gives you options.


3 views