Buying low thwarted by narrowest stock valuation gap ever

‘Not Expensive’

“With interest rates at current levels, the market is not expensive,” Donald Selkin, who helps manage about $3 billion as the New York-based chief market strategist at National Securities Corp., said in a Nov. 14 phone interview. “The market has room to go higher.”

Stocks have jumped as the Fed held its benchmark lending rate near zero since December 2008 and bought more than $2.3 trillion in Treasuries through unprecedented quantitative easing programs. Economists say the Fed will lower the $85 billion in monthly purchases to $70 billion in March, according to the median in a Bloomberg News survey conducted Nov. 8.

“What everybody’s been trying to figure out this year is how much longer is the Fed going to keep us on life support and if they do taper, are we going to continue to see the growth we’ve enjoyed the past couple of years?” Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc., said in a Nov. 14 phone interview. His firm manages more than $90 billion. “That’s the big question.”

Bull Markets

The last time the dispersion of valuations came close to being this narrow was in October 2006, a year before the last bull market ended, Goldman Sachs data show. Before that, multiples were most compressed in September 1997, 10 months before the biggest bull market on record ended.

Goldman Sachs’s price-earnings ratio dispersion is a monthly reading of standard deviation, or the variance from the average, for companies in the S&P 500. Goldman Sachs compiles data for companies whose price-estimated earnings ratios are between zero and 75.

Bull markets since World War II have ended after about four years, according to the average of data compiled by Bloomberg and Birinyi Associates Inc. This rally has lasted more than 4 1/2 years. Its 166% gain has exceeded the 122% average return for the last 12 bull markets.

“We’ve gone from the fear of losing to the fear of losing out,” Leclerc said. “That’s always a dangerous inflection point.”

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