By BRETT ARENDS
I went down to McDonald's today to get a Big Mac. On the door it said they were having a promotion: All hamburgers were on sale. Naturally I turned around and left. I'm not eating there anymore! On the contrary, I went home and threw out all the hamburger we had in the freezer as well. If hamburger's on sale it can't be any good.
If you think this sounds nuts, you're right. But it's the way people react when the stock market falls. "Oh, it's falling, I'd better sell." Wall Street took a tumble today. The Dow Jones Industrial Average lost 251 points. Yikes! It was the second worst day of the year.
So what? So not very much. If you had to sell your stocks it's a problem. If you don't, it isn't. The sell-off means only one thing: Stocks are a bit cheaper than they were the day before.
Is this the time to buy? Cheaper doesn't mean cheap. U.S. equities are still on the pricey side. The dividend yield on the Standard & Poor's 500 index is barely above 2%. That's chickenfeed. Stocks traded for about 21 times their average earnings for the past ten years, according to data compiled by Yale finance professor Robert Shiller. (That's a very good long-term measure of whether the stock market's a good value).
At these levels the market isn't a bubble, but it's expensive by historic norms. Over time the stock market has traded on an average rating of 16 times ten-year earnings. I'm greedy. I like cheap stocks and cheap hamburger. To be downright cheap, the Standard & Poor's 500 would have to be around 1000 or below. There are - as always cheap individual stocks out there and reasonable bargains, but the market overall is hardly a deal.
If you want really cheap, take a look overseas. European and Japanese stocks are, in many cases, trading at very good valuations. The French market has a dividend yield of 4.5%. Spain is 7%. Japan is only 2.4%, but that's huge by the standards of that market.
Sure, they may get even cheaper. I never try to time the market. Reasonable value is reasonable value.
The problem with Europe is that many of the banks are bust, and when you buy an index fund you get a whole bunch of them in your portfolio along with the good stuff. But you can avoid that through stock selection.