Is it overvalued? Will long-term returns be poor from here?

Now for a trader, these two questions don’t really matter — perception, momentum, fear, greed, psychology, these things disconnect completely from whether or not the market is good “value” or not. In my experience, where the market is concerned, a trader should pretty much ignore anything that isn’t going to immediately provide short-term results. So this effectively rules out big picture ideas about debt, jobs, valuation etc. These things aren’t going to tell me if I should be long or short the Dow for a day.

For an investor though, the market in a raging bull market may not be great value. The world’s major indices at the time of writing (January 2014) trade at ~20 times their earnings, which is a lot of expectations to live up to. There’s too much of a feel good factor out there — the result of investors crushing the worries of permabears for several straight years, and repeatedly winning.

It doesn’t mean everything out there is expensive, and for traders it doesn’t mean anything at all. But applied in a different setting, to investing rather than trading, there may be some valid concerns about the market.

With everyone chasing yield at all costs, it’s caused a great many risky assets to become … shall we say “heartily priced” in the last year or so. It could get worse. But corporate bonds especially have been a target for anyone awash with liquidity/cash.

When the money starts coming out, it could be particularly ugly for some super expensive shares — and meanwhile the proceeds could easily end up pumping stocks/property up even further. So there’s a risk that high valuation shares could move one way (or more severely) when stocks do something different.

I can think of few things as outrageously priced in the last few years as bonds, and there have been some pretty crazy valuations out there! 🙂