Commentary > Bid and Ask
Stocks are cheap!
Professional investors think stocks are a great buy now. How worrisome.
July 24, 2003: 8:50 AM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Sure, the market has had a big-time rally since October. But stocks are far cheaper now then they were back then.

In fact, stocks really haven't been such a good deal since 1989. You think getting into stocks in 1990 or jumping in at the end of the 1994 selloff would have been good buys, you should be loading up the truck now. Really.

Or so think the institutional investors polled by Yale economics professor Robert Shiller, who started keeping tabs on investor attitudes in 1984 and has been using the results to construct investor confidence indexes since October 1989. According to the latest reading, taken in June, 74.4 percent of institutional investors thought the stock market's valuation was "too low" or "about right". Other than the slightly higher May reading of 75.8 percent, the last time stocks were so darn cheap was in October of 1989, when the index hit 80.6 percent.

Shiller's other indexes are also flashing high levels of confidence among market pros. The pros have never been so certain that the market wasn't due for a big downturn, for instance, and they've rarely been so certain that stocks would be higher a year later. Oh, and buying on dips is a really good idea right now.

It's all rather disconcerting. If investors are so darn cocksure, where, exactly, is the undiscovered value in the stock market? There are plenty of fine reasons to think the market could do well here -- signs of improvement in the economy, for instance, and an improved earnings outlook -- but to say this is the best time to buy in years is plainly ridiculous.

Shiller's indexes are giving off a similar signal to the readings on sentiment maintained by Merrill Lynch's strategist group. Based on Wall Street strategists' stock and bond allocations, the "sell side indicator" is not flashing as high levels of bullishness as back in late 2000 (when stocks were a real steal, apparently), but it is still quite high historically. Merrill chief U.S. strategist Rich Bernstein says that, as a contrary indicator, the sell side indicator is the best market-timing barometer he's found. Independent analysis by Santa Clara finance professor Meir Statman has shown it works well.

So, we know what the pros think, but what about what Wall Streeters affectionately call the "dumb money" -- individual investors? Shiller's been keeping an eye on them as well, and they too are rather bullish. But not quite as bullish as their smart-money peers when it comes to valuations. In fact, they thought the stock market was a better value back in the fall than it is now.

Maybe they're not so dumb after all.  Top of page

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