Is the Market Priced Correctly? A Look at Recent Market Moves

March
21

Written by: Jon McGraw

There is ongoing debate about whether markets behave in rational ways.

The efficient market hypothesis suggests it’s impossible to outperform the stock market because current share prices reflect all relevant information. In other words, stocks should always trade at fair value and it should be impossible to invest in a stock that is overpriced or underpriced.

The Economist reported there are two issues that efficient market theorists have trouble explaining. The first is market bubbles, “where entire markets get out of whack with traditional valuation measures and then collapse.” The other is pricing anomalies. For instance, value stocks are inexpensive relative to their asset values and tend to outperform over the long term. In a perfect market, pricing anomalies shouldn’t occur.

During the past few weeks, U.S. stock markets have recovered from losses suffered earlier in the year and moved into positive territory for 2016. The shift into positive territory has some suggesting the market may not be correctly priced, but there is disagreement about whether it is overvalued or undervalued.

According to Barron’s, the recent strong performance of U.S. stock markets hasn’t been inspired by sound decisions and rational economic behavior. “The market’s valuation, at 17 times consensus analyst earnings-per-share estimates for 2016, looks stretched again, given that easy monetary policy and rising oil prices—not earnings growth—are responsible.”

Wharton Professor of Finance Jeremy Siegel disagreed. “On an absolute basis [the stock market is] slightly more highly valued than average but relative to interest rates, which are extremely low, it is actually undervalued in my opinion.”

Investors who believe markets perform well most of the time, but not all of the time, may want to take opportunities like these to look for companies whose shares may be mispriced as well.

Data as of 3/18/16 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 1.4% 0.3% -2.4% 9.7% 9.9% 4.6%
Dow Jones Global ex-U.S. 1.6 -1.0 -11.0 -1.6 -0.9 -0.3
10-year Treasury Note (Yield Only) 1.9 NA 2.0 2.0 3.3 4.7
Gold (per ounce) -1.0 17.9 9.1 -7.9 -2.5 8.5
Bloomberg Commodity Index 1.0 2.8 -17.8 -16.3 -13.3 -6.6
DJ Equity All REIT Total Return Index 2.2 4.0 2.4 9.8 11.8 6.3

Here’s a Milestone You Don’t Reach Until Your 70s

The major milestones of older Americans are not attended with the same sense of wonder that accompanies the major milestones of younger Americans. Sure, registering for Social Security benefits and signing up for Medicare are rites of passage, but they don’t hold a candle to earning your driver’s license, receiving your first kiss, winning your first promotion or dancing at your wedding.

If you have retirement accounts when you become a septuagenarian, then you’ll encounter a milestone that the Internal Revenue Service strongly encourages you to remember. Beginning April 1 of the year following the year in which you reach age 70½, you must begin taking required minimum distributions (RMDs) from most of your retirement accounts. Forbes offered this list:

  • Traditional IRAs
  • Rollover IRAs
  • Inherited IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k), 403(b) and 457(b) plan accounts
  • Keogh plans

There currently are no RMDs for Roth IRAs, unless the accounts were inherited.

If you have more than one qualifying retirement account, then a separate RMD must be calculated for each account. If you want to withdraw a portion of each account, you can, but it may prove simpler to take the entire amount due from a single account. Once you start, you must take RMDs by December 31 every year. If you don’t, you’ll owe some hefty penalty taxes.

The IRS offers some instructions for calculating the RMD due: “The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’ ‘Uniform Lifetime Table.’ A separate table is used if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner.”

If you would prefer to have some help figuring out the correct amount when RMDs are due, contact your financial professional.

Weekly Fun—Think About It

“It wasn’t by accident that the Gettysburg address was so short. The laws of prose writing are as immutable as those of flight, of mathematics, of physics.”

–Ernest Hemingway, American writer