An indicator for the bulls

[TommyIV]

The bear argument is an easy one for stocks at the moment. However here we are and a new record high was set today in the S&P 500. Maybe I'm biased because I'm currently out of stocks but I feel its hard to make a solid bull argument speaking in stock valuation terms. Well James Paulsen has pointed to an indicator that suggest plenty of justifiable room for growth in stocks.

From MarketWatch:

Paulsen turns to what he describes as the output-gap-adjusted P/E multiple, or OGA P/E, which calculates the percent difference between the current level of real gross domestic product and its estimated potential level if the economy were operating at full employment and adjusting the trailing P/E based on the degree to which the output gap trails the average since 1950.

Read more on it but essentially the adjusted P/E ratios for this indicator puts stocks at a fairly affordable level. Anyone buying this?

The stock market is rich but may be at a ‘far more reasonable valuation level than traditional measures suggest’

 

[flalaw97]

It seems like he is saying the gap is big enough that when things get back to "normal" the stocks will be valued higher than they are now. Maybe an analogy would be anticipated overnight trading (recovery) - at close the market is undervalued given what will happen that evening, causing the opening price (after recovery) to shoot up? It's like trying to model what would the market look like if the COVID wasn't getting in the way?

 

[TommyIV]

I think you're right. Its justifying buying a seemingly expensive stock or index now assuming the economy will recover to its historical averages, which will then justify the price you paid today. The economy and markets are rarely in sync because markets are valuing a hypothetical future economy. Buy today not because the economy is in great shape but because you believe it will be down the road.