American Funds ®

Market Commentary

January 2014

Equity Valuations Find Middle Ground

American Funds Portfolio Manager Jim Rothenberg discusses the overall state of company valuations in light of growth in the markets, finding both low and high valuations, but much middle ground.



James F. Rothenberg


Kevin Clifford: We’ve had several years now of very strong equity returns: the S&P, the Dow, the NASDAQ, all getting back to levels we haven’t seen before or in quite some time. When you listen to our analysts, when you think about portfolios, what do you think about valuations right now?

Jim Rothenberg: If you went back and looked at the markets, which, except for the NASDAQ index, have now broken above — give or take more recent days — the highs that they established in 2007 (the NASDAQ is still below where it was in March of 2000), but if you look at the Wilshire 5000 index, and you look at its total value, and you look at a long enough period of time, it’s gone up from $8 trillion to $14 trillion to $19 trillion. And in that last move from $14 to $19 trillion of value, the economy, if you will, has gone up not too different [an] amount, slightly less.

And so there’s a ratio that some people use — which is the ratio of that stock market value to gross domestic product in the United States — as a proxy. And if you look at that ratio over a long period of time, we’re sort of right in the middle, between cheap and expensive. So I’d have to say that, in general, companies are more expensive than they were and not as expensive as we have seen at other times.

And again, I think a lot depends on what you’re looking at, because there are very high valuations — almost infinite valuations on companies like Facebook and Twitter, which really don’t have any earnings — and then there are many other companies with very reasonable valuations. So I think you have a lot of things to look at; you have a lot of things to think about. I don’t think the markets are so expensive that it drives somebody to say, “I don’t want to own equities.” And so I think it’s going to be more a focus around what equities you own.

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