U.S. Stocks 40% Overvalued, Headed for Declines, Smithers Says

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U.S. Stocks 40% Overvalued, Headed for Declines, Smithers Says
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By Patrick Rial

Oct. 26 (Bloomberg) -- U.S. equities are about 40 percent above their fair value and headed for a decline as central banks pull back on quantitative easing that has pushed up asset prices, according to economist Andrew Smithers.

“Markets are very vulnerable to an end of quantitative easing,” the economist said in an interview at Bloomberg’s Tokyo office on Oct. 23. “Central banks, they’ve got to stop some time and if that happens everything will come down.”

Asset purchases have doubled the size of the Federal Reserve’s balance sheet to $2.1 trillion since the start of the current financial crisis. The Bank of England has spent 175 billion-pounds ($286 billion) over the last seven months to rescue the economy.

The asset purchases, among quantitative easing measures to increase money supply, have been responsible for inflating everything from equities to commodities and real estate prices globally, Smithers said.

In “Valuing Wall Street,” his March 2000 book co-authored with economist Stephen Wright, Smithers argued that U.S. equities were grossly overvalued and should be sold. The Standard & Poor’s 500 Index plunged 49 percent over 2 1/2 years from a then-record high reached that month. Smithers said he stopped buying equities in the 1990s and began purchasing them again only for a brief period during the lows of the current crisis.

Smithers based his research for the book on Tobin’s Q, an indicator of whether the market is overvaluing or undervaluing company assets compared with their replacement cost. He now uses both the Q ratio, as well as a cyclically adjusted price-to- earnings ratio compiled by Yale University’s Robert Shiller, for his estimate that U.S. shares are 40 percent overvalued.

Japan may be the world’s cheapest major market, he said, though he doesn’t forecast short-term gains from betting on the nation’s stocks.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.
Last Updated: October 25, 2009 21:35 EDT

 

Anyone who knows anything about the markets know they're way overvalued. That doesn't mean they can't go higher short term.

I've been trading full time 14 years. I've been wrong short term before. I recal shorting VTSS at 96 in early 2000. The next day semi's ripped and VTSS was at 120. Can you say irrational exuberance? I waited, was patient and made $$$$. Today VTSS is pink sheets trading at 23 cents. Wish I'd held ....