Although two of the three major U.S. equity indexes moved lower on Friday, all reached new record highs this month, John “Jack” Bogle, founder of the Vanguard Group, said that the market seems to be “fully valued.”
“The valuations of stocks are, by my standards, rather high,” said Bogle in an interview with TheStreet. “My standards, however, are high,” the 88-year-old investing icon added.
This year, the U.S. stock market has climbed ever higher — the Dow Jones Industrial Average surpassed 20,000, and is now moving closer to 23,000. The Nasdaq has gained 22.42% year-to-date and the S&P 500 saw gains for eight consecutive days, the longest streak since 2013. However, the Dow and the S&P 500 closed in the red on Friday, down 0.01% and 0.11%, respectively. The Nasdaq held onto small gains, 0.07%, on Friday.
When considering stock valuations, Bogle’s method differs from Wall Street’s. For his price-to-earnings multiple, Bogle uses the past 12 months of reported earnings by corporations, GAAP earnings, which include “all of the bad stuff,” to get a multiple of about 25 or 26 times earnings.
“Wall Street will have none of that,” said Bogle. “They look ahead to the earnings for the next 12 months and we don’t really know what they are so it’s a little gamble.” He also noted that Wall Street analysts look at operating earnings, “earnings without all that bad stuff,” and come up with a price-to-earnings multiple of something in the range of 17 or 18.
“If you believe the way we look at it, much more realistically I think, the P/E is relatively high,” Bogle said.
Still, he acknowledged that the P/E can stay high for a long time, adding that it will gradually come down as earnings grow, even at a slow rate.
But the earnings growth in the years ahead might be “as low as 4% or 5%, maybe 6% lower than traditionally and historically,” Bogle said.
“I believe strongly that [investors] should be realizing valuations are fairly full, and if they are nervous they could easily sell off a portion of their stocks.,” said Bogle, adding that investors should not sell much.
“One thing that I strongly urge: Don’t ever, ever, ever if you’re an investor think of being out of the market or in the market,” Bogle said. Instead, an investor should adjust his or her asset allocation.
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