Friday, May 17, 2013

Is the Stock Market Undervalued?

Gillian Tett sees a soaring stock market and frets that we are experienced a bubble. Antonio Fatas and Paul Krugman calmly remind us of the fundamentals. Paul notes that the stock price rally tracks earnings growth which implies we have not seen much in the way of an increase in the price to earnings ratio whereas Antonio notes:
interest rates are low because of a trend that started in the mid 2000s of increased saving in some emerging markets and the effects of the great recession that increased saving in advanced economies and made investment collapse. When no one wants to invest or consume, interest rates are low. And they are unusually low this time because the patterns of investment and saving are driven by a crisis that is very large compared to historical patterns. As a reminder, interest rates are low everywhere not just in countries where quantitative easing is taking place
Wait – with lower interest rates, the question should be why hasn’t the price to earnings ratio increased? In other words, with higher earnings and lower interest rates, shouldn’t stock prices be even higher?

3 comments:

john said...

The answer to that is, yes. Go and invest.

Diamond Neil said...

interest rates are low because of a trend that started in the mid 2000s of increased saving in some emerging markets and the effects of the great recession that increased saving in advanced economies and made investment collapse. When no one wants to invest or consume,how to invest in the stock market

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