Is the Market Overpriced?

Is the market overpriced? Or does it still represent reasonable value? The answer will depend on who you ask and, more importantly, what you ask and what your chosen expert focuses on in providing a response.

It is a matter of record that Wall Street and the Australian market are, despite easing recently, still not far off record levels, as measured by share price indices. The Australian market, when measured in terms of average price earnings ratios based on forecast earnings for leading industrial stocks, is as expensive as it has ever been. Considered on the basis of these criteria alone, there would seem to be good cause for nervousness about the market’s ability to sustain current levels.

But this analysis ignores the influence of interest rates on share prices, in turn a function of the relationship that exists between interest rates and share yields in basically deregulated financial markets. As we know, interest rates are at their lowest level for many years.

If we evaluate the stockmarket on the basis of a comparison of the current level of earnings yields on shares with yields offering on bonds, a different interpretation can emerge. On this basis, shares could be described as under priced