Stock market valuations may be fully priced, but opportunity for value remains

Print commentary

We believe that the broad stock market is currently fully priced for several reasons, including:

  • Historically high price-to-earnings (P/E) ratio. The surge in equity prices during the bull market of recent years has pushed market valuation levels above their long-run averages. As shown in the chart below, the price-to-earnings ratio for the S&P 500® Index (based on 5-year average earnings) is above 20. This is significantly higher than its long-term average of 16 and puts the broad market in the second-highest valuation quintile relative to its own history.
  • Secular bear market*. We believe the market has been in a “secular bear” phase since March 2000. One defining element of a secular bear market, in our view, involves a long, slow decline in P/E ratios. Although valuations may spike briefly in the near term, we think they need to fall to much lower levels before a long-term bull market may begin once again.
  • Recessionary conditions overseas. We believe recessionary conditions in the euro zone and slower economic growth in China have crimped aggregate demand and contributed to lower corporate sales growth. Muted sales and profit growth could, in our opinion, dampen investor sentiment and bring the market back in line with what we believe are soft overall fundamentals.

*A secular bear market is typically recognized as an extended period in which stock prices are either flat or generally trending downward. Secular bear markets can last a long time; it’s not uncommon to see them extend beyond 10 years.


Data: Ned Davis Research, February, 2013.

Chart is for illustrative purposes only and is not representative of the performance of any specific investment. Past performance does not guarantee future results.

Information is as of the date indicated and subject to change.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the U.S. stock market. An index is unmanaged and one cannot invest directly in an index. Index performance returns do not reflect any management fees, transaction costs, or expenses.

The price-to-earnings ratio, or P/E ratio, is a valuation ratio of a company’s current share price compared to its earnings per share. *GAAP refers to generally accepted accounting principles.

All third-party marks cited are the property of their respective owners.


In light of our outlook, we remain focused on shares of companies that appear demonstrably undervalued to us and that have, in our assessment, characteristics such as the following:

  • strong cash flows
  • manageable debt levels
  • diversified businesses
  • good dividends

In our view, these represent some of the more favorable investment opportunities in the current environment because we believe they may hold up comparatively well and may have the potential to produce competitive total returns in a market upturn.

Consult your financial advisor to learn more about the potential benefits, as well as the risks of value equity investments, and to determine whether they may be suitable for you.

The views expressed represent the Manager’s assessment of the market environment as of March 2013, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager’s current views.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.


Investing involves risk, including the possible loss of principal.

Investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligations to update any forward-looking statements to reflect events or circumstances that occur after the date of this document.

Value investing focuses on buying stocks that are trading at bargain prices based on fundamental analysis, then holding them until they become fully valued. Typically, value investors select securities with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.

Diversification may not protect against market risk.

There is no guarantee that dividend-paying stocks will continue to pay dividends.