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Are Stocks Really A Bargain?
A Dramatic Illustration of OVERvaluation
Now that the U.S. stock market has endured its most devastating October in recent memory -- with the Dow Jones Industrial Average more than 40% below its all-time October 2007 peak -- one question rises above the rest: Are stocks at bargain-basement levels?
According to Main Street -- Yes. In their eyes, stocks have undergone a kind of "controlled burning," in which charred shares nourish the scorched soil and yield new growth. On this, the following news items from recent weeks speaks volumes:
- "Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread." (Warren Buffet, Oracle of Omaha)
- "US stocks jump as the cheapest valuations in 23 years lured investors. Anyone who has a long-term view and looks at earnings and inflation will say it’s a cheap moment to buy stocks." (Bloomberg)
- "The low valuation that stocks reached provides another argument for a bottom. Dust yourself off and start investing." (Denver Post)
One problem: The mainstream "gauges" of market growth are often distorted. Fact is, when it comes to determining the real value of stocks, the purest measure is not the proverbial Price-to-Earnings, or P/E, ratio -- it's the Dividend Yield: the annual cut that the 30 companies listed on the DJIA pay out to shareholders as a percentage of their stock prices.
(Is It Time To Buy Stocks? The November 2008 Financial Forecast Service offers the most objective and comprehensive insight into whether the world's leading stock market has hit bottom. Act now.)
In his 2002 best-selling book Conquer The Crash, Elliott Wave International CEO Bob Prechter presents this one-of-a-kind close up of the Dow Jones Industrial Average versus the Dow's dividend yield -- since 1915.
One look at this spellbinding picture and reality comes into startling focus: The DJIA's dividend yield tends to be around 6.5% at bear market bottoms (soared to 16% at the Great Depression floor in 1933!) -- right when the trend is turning UP, along with capital gains.
Conversely, the yield has been low at major tops -- right when the market nosedives and the need for a risk-premium increases. (I.e., at the 2000 peak, the Dow's dividend yield plunged to a historic low of 1.5%)
As for where the dividend yield stands today? On page 4, the November 2008 Elliott Wave Financial Forecast reprises the chart from Conquer the Crash and picks up where Bob Prechter left off.
The updated version sends a profound message: After 15 years of remaining beneath the lowest dotted horizontal line, the DJIA's dividend yield recently ended its long stay below its bottom ticks of 1929, 1968, and 1987.
Still, the November Elliott Wave Financial Forecast also notes: The current level of the dividend yield continues to "represent the greatest OVERvaluation in history."