Stocks are grossly overvalued. I hope I have your attention. Because in the next few minutes I’ll explain why that is and why the stock market is likely to go on a “mean” streak that will be damaging to many portfolios. A common metric for analyzing valuation is the price-to-earnings ratio (i.e. the P/E ratio). This ratio tells investors what the market is willing to pay at a given moment for a stock based on its past or future earnings. Historically, a P/E ratio of 16 is considered to be about average. So stocks with a P/E below 16 are cheap. Those with a higher P/E are expensive. The number for all of the stocks in the S&P 500 index today is 46. To the uninformed, that means investors are willing (or forced) to pay $46 for every dollar of a company’s profits. This means that stocks are likely to do a reversion to the mean. And that’s a mean streak that investors won’t like one bit. Here’s a quick illustration using a $10,000 investment. That money invested in stocks with an “average” P/E would become $67,275 in 20 years. But at today’s levels, that same investment would return just under $27,000. That’s not the kind of surprise you want at the time you’re trying to retire. Do we know when this will happen? No, but we know it will because it always does. And no, this time is not different. But there is a way to help protect your portfolio from that risk. You can diversify your portfolio with defensive stocks. These stocks are companies that offer products that consumers will buy regardless of the state of the economy. These stocks tend to underperform during strong bull markets. Conversely, they tend to outperform the market during corrections. In this presentation, we’ve identified seven defensive stocks that you can buy to give your portfolio a hedge against a jittery market. It seems counterintuitive when the market seems to reach record highs every week. However, the time to fix your roof is before the rain starts. It’s never a bad time to start protecting the gains you’ve made. View the “7 Defensive Stocks to Buy on Market Jitters”
Matthew Paulson
MarketBeat.com | 
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