Andrew Smithers Still Considers Stock Market Extremely Overvalued

By on August 23, 2011

Bloomberg reports that economist Andrew Smithers considers the U. S. stock market 40% above fair value. Smithers sees an imminent rally of around 10% giving investors an opportunity to sell before stocks turn down again. Today appears to be a good start to the rally he forecast a few days ago.

Smithers uses Equity Q, similar to James Tobin’s q, to indicate whether the market is overvaluing or undervaluing company assets.

Smithers also warned of overvaluation in the year 2000, a very prescient prediction as the S&P 500 is currently below its level back then.

Smithers believes current seemingly reasonable PE ratios do not justify equity purchases. He says it would be foolish to buy equities based on this given his view that profits are currently inflated.

Smithers warned, “Investors should not, in general, buy stocks at this level, as the stock market is likely to become cheap at some time during the next 10 years and there is therefore a high risk that anyone buying today will lose money before they start to get a positive return,” Smithers said. “In these circumstances, they are likely to be better off by holding cash until the market has fallen.”

Source: Bloomberg

3 Comments

  1. Berry McCaulkiner

    August 24, 2011 at 10:33 am

    I respect Smithers, but his predictions haven’t always hit their mark. He said the U.S. stock market was 40% overvalued in December 2009 as well. 15 months later it was up another 20%.

    At the same time he said he was bullish on Japan. The Japanese market is lower now than when he made the call.

    Smithers is a good long term forecaster, but you can’t bury your head in the mud for 10 years waiting for his predictions to come true. Plenty of good money can be made in between. Funny thing is, he says the same thing. He thinks buy and hold is nonsensical.

  2. Don Keedix

    August 24, 2011 at 1:38 pm

    Yeah, he’s a smart guy. Just rememember who pays his salary, fund managers. He’d like nothing more than for you to sell your shares on the cheap to his clients.

  3. Lou Skuntz

    August 24, 2011 at 4:46 pm

    I’m all for ECON 101, but the older I get, the more I think advanced economics is closer to voodoo than science. At least as a predictor of future events. I don’t discount most of these people are bright and well intentioned, but there are too many variables to account for.

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