The Secret Nobody Wants to Hear About Stocks
Editor's note: Yesterday, our colleague Steve Sjuggerud made the case that stocks are still cheap.
Today's Masters Series originally appeared in the October 15 and October 23 editions of our free DailyWealth e-letter. In it, Steve offers more proof that stocks are inexpensive... explains why the best is yet to come... and begs readers not to stand on the sidelines...
The Secret Nobody Wants to Hear About Stocks
Quick! What's the most classic measure of stock market value?
If you said "the P/E ratio," then congratulations... You are right.
Next question! Are stocks cheap or expensive today?
Yes, it's a trick question...
If you've been reading my work for long, then you probably know my answer already. Just yesterday, I showed you how stocks are actually cheap according to the main long-term measure of value.
The problem is, if you say this to the people in your life, most of them won't believe you...
Everyone knows that stocks have gone up for almost 10 years now – without a losing year. So it would be crazy for stocks to be cheap today, right?
Today, I'll tell you a secret nobody wants to hear: It's not crazy at all...
Let me share one number with you: 13.7.
That's the price-to-earnings (P/E) ratio of the U.S. stock market, based on analyst estimates of stock market earnings over the next two years. This is also known as the two-year forward P/E ratio.
This, my friend, is a low number... It's lower than its average value, going back 22 years.
Let me repeat that... The two-year forward P/E ratio today is below its average value going back to 1996.
How could the two-year forward P/E ratio be low after 10 years of good times in stocks?
The answer is simple: Earnings growth.
Some numbers from Bloomberg tell the story...
U.S. corporate earnings are growing at an astounding pace. And the consensus of analysts surveyed by Bloomberg is that earnings growth will continue. Take a look...
Specifically, analysts expect corporate earnings to grow from 138 this year to an incredible 197 by the end of 2020, two years from now. So when we look at the P/E ratio, if we leave the "P" the same, and we plug in those future numbers for the "E" – we end up with a radical result: Stocks are below their average value since 1996.
Will these analysts be right about future earnings? We can't know for certain. But short of a crystal ball, analyst projections give us a pretty good idea to work with.
My point today is simple:
- Don't let 10 years of gains in stock prices cloud the truth.
- Thanks to crazy earnings growth, the two-year forward P/E ratio of stocks is below its average value going back to 1996.
- Today's valuation is not "standing in the way" of even higher stock prices.
I am certain plenty of folks will want to argue with me...
They have made up their minds that stock prices have to fall... So they only look for facts they can use to confirm their belief.
But what if we just look at the basic facts, by themselves?
The P/E ratio is the all-time classic measure of value... And the two-year forward P/E ratio is trading just below its average value over the past 22 years.
Those are the facts.
And that's why I will keep on shouting them from the rooftops...
Most people believe that – after 10 years of higher stock prices – stocks can't possibly go higher. The secret is, they can...
The Best Days of the 'Melt Up' Are Coming
If you're not taking advantage of this bull market yet, my big question for you is this: What are you waiting for?
If you're nervous about the stock market, you're not alone. Several investors I've talked to recently were "waiting for a dip to get in at a better price." And that's if they're planning to get back in at all.
Now that we've seen a dip, those same folks are even more scared of the markets. Many investors now have no plans whatsoever to buy more stocks.
This is a huge mistake.
Let me explain...
You probably know by now that I think a stock market "Melt Up" is just around the corner – where stocks make one final, dramatic push higher before a furious peak.
But the folks I have talked to are either trying to time it... or planning to sit on the sidelines.
My friend, trying to time when the Melt Up takes off could cause you to miss out on triple-digit gains in some stocks.
You don't want to wait until stocks start soaring... and THEN decide to get in.
Melt Ups are big and fast... The tech-heavy Nasdaq index alone delivered triple-digit gains in the final 12 months of the last great Melt Up.
Sitting on the sidelines and missing out on even a few big days during that time could've been deadly to your returns.
I'm telling you, don't try to outsmart the Melt Up!
If you're waiting on the sidelines for a buying opportunity, chances are, you'll miss the good days. And as you probably know, you REALLY don't want to miss out on the good days in the markets...
For example, if you had $10,000 in the S&P 500 Index over the past 20 years... but you happened to miss the best 40 days of market gains... you'd only be left with around $5,600.
If you kept your money invested the entire time, however, you'd have more than $40,000.
That's right... Just 40 days meant the difference between losing $4,000 or making $30,000!
You can see this in the table below. It shows what missing the best days of the market would have done to your returns over the 20-year period from the start of 1998 to the end of 2017...
The lesson is simple. Missing out on just a few big moves higher could mean not only missing triple-digit gains, but actually losing money.
So if you're still waiting for a chance to buy... or if you're afraid to buy stocks at all... I don't want you to miss out.
This will likely be the last Melt Up opportunity for many people in their lifetimes. And certain stocks could return triple digits as the market moves higher.
"But Steve, I'm worried about the trade war between the U.S. and China," I've heard from some folks. "Shouldn't I just pull some money out of the market to be safe? Or shouldn't I wait until it's over?"
No. People are always looking for a reason NOT to buy. Trust me, you can always find something.
There will be a time to be cautious. But that time is after the Melt Up.
We are not there yet. So again, I urge you – "make hay while the sun is shining"...
Good investing,
Steve Sjuggerud
Editor's note: While Steve believes the overall market is going to experience a Melt Up, he has singled out a group of stocks that he says will be the biggest winners. And he even says his No. 1 Melt Up stock could go on to become the best-performing recommendation in Stansberry Research history. Get the details here.