L Boyd

What Does It Mean That Stocks Are Undervalued?

I will not dispute the fact of whether or not stocks are "cheap". It should be noted that, while using the prior ten years' earnings do erase the effects of the business cycle, the past ten years have been somewhat of anomaly. Corporate earnings were fueled by consumer (and therefore business) spending based on ever increasing leverage. We got to the point that we were spending more than we were making, as a NATION! People were using low interest rates, via credit cards and home "equity" credit lines, to buy, buy, buy. This obviously couldn't go on forever (though it is very surprising, to me at least, how long the party did last) and we're now faced with a crash back to reality. It is highly doubtful that people will spend like they did over the past decade. In the near term we will probably see an "over correction" in consumer spending, but probably a much needed one. Are stocks historically "cheap"? Possibly; but I would take a look at the past ten years' earnings with a grain of salt.