[3/26/07] where do we stand heading into the second quarter? The median stock in our [Morningstars's] coverage universe is about 4% overvalued, in our opinion. Not too hot. Not too cold. For some historical perspective, the highest the median stock has ever gotten was 14% overvalued, back in December 2004. The lowest: 22% undervalued in October 2002. At current levels, we'd expect the typical stock to offer positive--but single-digit--returns to long-term investors.
[1/28/07] Coming off of double-digit market returns in 2006, we asked three respected industry experts for their thoughts on what may be in store for 2007. Read what Jeremy Siegel, finance professor at the University of Pennsylvania Wharton School of Business and author of Stocks for the Long Run and The Future for Investors; Robert Shiller, economics professor at the Yale University School of Management, chief economist at MacroMarkets LLC, and author of Irrational Exuberance; and Sam Stovall, chief market strategist for Standard & Poor's,® said.
Q. What's your outlook for the stock market in 2007?
Stovall: Our target for the S&P 500 is 1,510 by year-end 2007. On average, bull markets, as measured by the S&P 500 Index, last four and a half years. (The current bull market reached the four-year mark in October 2006). We have had six bull markets that entered a fifth year. The average gain has been 8%. Four of the six bull markets celebrated a fifth birthday. In addition, the market has never declined in the third year of a president's term since World War II, with an average gain of 18%.
Shiller: The stock market looks overvalued to me, in terms of the way I calculate P/E ratios. Corporate earnings are looking weaker and the market is still highly priced. I think there is some downward risk potential.
Siegel: My feeling is we'll have a healthy market. I don't think it's a runaway market and I don't think it's a crashing market. But I think we will have a healthy market since earnings are rising and interest rates look like they'll be stable. I don't see a recession in the cards for this year. Unless you get strongly rising interest rates, it's very hard to keep the stock market down under those circumstances.
[1/15/07] Six months ago, the stock market looked reasonably priced when compared with Morningstar's collective fair value estimates. Since then, the market has been on a tear. Between July 21, when the median fair value of our coverage universe bottomed, and Dec. 31 the Morningstar U.S. Market Index rose 15%. As a result, we're heading into 2007 with a fairly pessimistic view of the stock market.
In fact, the median stock is priced to return single digits over the next three to five years, in our view. If you threw a dart at our coverage list, your expected three-year return would be 8.8%, down from 10.5% four months earlier. The median stock in our coverage universe of 1,800 stocks trades at a 12% premium to our estimate of fair value.
Quality, blue-chip companies, which tend to be larger, appear relatively cheap. When we look at valuations weighted by market capitalization--which give greater weight to larger companies--the stock market appears more fairly valued. The S&P 500, a cap-weighted index, trades very close to our bottom-up measure of fair value. When we weight by capitalization, three out of our 12 sectors are currently undervalued: software, health care, and consumer services.
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