S & P 500 - Investment Opportunity or Overvalued Index?

The S & P 500 reaches new all time high price levels as the end of the year 2017 comes closer. The biggest question is how long this bull market will continue and if stocks are overvalued or priced fairly at current stock prices. Although we are in the second longest bull market and statistically we are overdue for a bigger market correction I will explain why my personal oppinion to the market outlook is still bullish and why I think that we will reach S & P 500 index price levels of 2660 by the year end and even price levels of 3000 in the year 2018.

(See: https://www.finanzen100.de/finanznachrichten/wirtschaft/zweitlaengste-hausse-aller-zeiten-wie-lange-koennen-anleger-diesen-bullenmarkt-noch-reiten-statistisch-sieht-es-mau-aus-aber_H1064755389_331333/)

Decision To Reduce Risks Involved

I decided to take the profit of the X25 leveraged investment in the S & P 500 index and change it to a X1 leveraged investment in the S & P 500 index. This is mainly because there might be a 10% correction soon (although the long term perspective on the index looks still bullish). With a X25 leveraged investment a 10% correction means a total loss of the capital invested. The goal is to achieve a 2% performance per month with the portfolio and minimal losses so a X1 leveraged investment is the better decision for the rest of the year. This decision also reduces financing costs as there are no financing costs with a X1 leverage investment.


Historic Valuations Of The S & P 500 Index

First lets start with an overview of the historic prices of the S & P 500 index. If you look at the historic Price / Earnings Ratio of the S & P 500 index you can see that a ratio of 25 was considered as a high price valuation of the index.

(See: http://www.multpl.com/)

However historic measures tell only half of the truth as some key facts are different in the current market situation. First the FED funds rate is still very low and credit money is cheap. Therefore there is a lot of liquidity available and no real alternatives in the bonds markets.

(See: https://fred.stlouisfed.org/series/FEDFUNDS)

That situation causes stock prices to be elevated much higher than in the past. While the FED will likely increase interest rates in 2018 in the US I think that the interest rates in Europe will likely stay at low to negative rates because of the dept situation of some states in the EU. Therefore price / earnings ratios of 25 could be the new averaged norm in the S & P 500 index.

(See: https://seekingalpha.com/article/4056553-25-p-e-s-and-p-500-might-new-norm)

Lets take a look at historic price to book ratios of the S & P 500 index. Here we can see that with a price to book ratio of 3,26 we are currently well below an all time high of the year 2000 at 5,0 when we had the technology bubble.

(See: http://www.multpl.com/s-p-500-price-to-book)

Therefore I think that the current prices of the S & P 500 index are still below levels where I would fear a bubble and get out of the stock markets. At price to book ratios of about 4,0 i will become more cautious however and reduce my investment in the stock markets.

Housing Market Index And Early Indicator For A Financial Crises Like 2007/2008

The HMI (housing market index) is a very good indicator for falling real estate prices in the US. If real estate prices fall dramatically there is a risk in the credit markets especially if the FED funds rate is high as well and people cannot afford to pay back their credit. Currently the FED funds rate is low and US citizens are much lower into dept than 2007. In addition the HMI index shows no signs of upcoming concerns regarding falling real estate prices. Most US citizens think that prices are likely to go higher (HMI is above 50).

(See: https://www.nahb.org/en/research/housing-economics/housing-indexes/housing-market-index.aspx)

Therefore the next bubble is more likely another technology bubble as technology stocks are way ahead in their prices than another financial crisis from falling real estate prices. But there could be another bubble ahead that i overlooked so far. You never know for sure where the next crisis comes from. Most likely I currently see bitcoin and other crypto currencies as a bubble that could burst sooner or later and I have to be cautious with too much speculation in crypto currencies.

(See: https://www.cnbc.com/2017/08/31/bitcons-nearly-five-fold-climb-in-2017-looks-very-similar-to-tech-bubble-surge.html)