The S&P 500 hit a new all-time high on Thursday, and it doesn't show any signs of slowing down. Of course while this is good for the stock market, it’s also having an interesting consequence for investors. Many of them are having trouble finding value in the markets, and for good reason.
Some are turning to bitcoins, the digital currency that’s still a puzzle for the markets as a whole, although it has greatly outperformed even the S&P 500 in just four years. Others are just following the S&P 500 closely as long positions hit a record high. In fact, theS&P 500 is outperforming all 15 hedge fund strategies so far this year.
Because of the recent rally in U.S. stocks however, analysts say the market is now trading just below fair value, using an average that’s weighted by market capitalization. Pragmatic Capitalism also points out that the Wilshire 5,000 total market cap index in comparison to the gross national product is now over 100 percent. That valuation metric happens to be billionaire investor Warren Buffett’s favorite measurement of the markets.
Analysts at Morningstar say investors who choose to focus on “specific stock opportunities” will likely do well in the current rally, but what about other investors? The high valuation of the markets has made it very difficult to find stocks that are undervalued, especially in the U.S. market. However, that doesn’t mean that there aren’t any stocks that are trading below fair value. Investors just need to be a little bit pickier with their investments right now.
Morningstar analysts say investors should start by looking at wide-moat businesses, which compound returns over time, so they make a better long-term investment for those who are seeking value in the markets. They also recommend looking at themes within the market. For example, they believe the energy sector remains mostly undervalued, especially in the U.S. natural gas market.
Of course there is always the chance that we’re in a bubble that’s simply going to pop sometime soon. Pragmatic Capitalism points out that the last time the Wilshire 5,000 total market cap index in comparison to the gross national product passed the 100 percent mark was in 2006 and 2007—right before stock prices tanked in 2007.