It’s very easy to get down on stocks right now. After all, stocks are at their all-time high as far as their valuations are concerned. You might think that there are some stocks in the tech space that are still bargains. However, if you look at them from their price-earnings ratios, it’s almost impossible to find a real bargain. We’re talking about price-earnings ratios that are ridiculous and completely out of this world.
It seems that investors have completely lost their minds when it comes to valuating equities. Why is this? There are many reasons of course, but the biggest and most obvious reason is that financial markets all over the world are awash in cheap stimulus liquidity. The US Federal Reserve, the European Central Bank, and the Bank of Japan have been engaged in a currency devaluation war using quantitative easing. All this money is flooding through financial markets, and it’s creating all sorts of moral hazards.
Not surprisingly, stocks that you wouldn’t normally invest with expensive money that you would have to repay look very attractive when you are loaded with cheap stimulus funds. This is why, for the most part, the market is overly valuated. This has led to many economists saying that it’s really not worth investing in stocks now. I tend to agree with this.
However, if you’re already in the market, stocks still win out. Why is this? If you extend the timeline far back and long enough, stock returns still win out. The ranges of annual returns you can get are from 13% to 19%. Outside of real estate, that is very hard to beat. However, unlike real estate which is hard to unload, often swings in value, and often takes a long time to liquidate; stocks are very liquid. Moreover, unlike real estate, investing in stocks do have some direct effect on the economy. With all these factors in mind, in the big scheme of things, despite everything, stocks still win out.