Happy Christmas, everyone! As I am just trying to learn more about market, hope someone can help answer my first posted question.
Question:
Are there more undervalued stocks in the bull market or bear market? I am not sure if there is a direct answer but just curious to see if there is any data on this.
Thanks a lot in advance!
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Beginer Investor, sorry about the lack of response. Maybe one of these topics will help:
Fingers crossed that one of those helps you.
There’s not really a black and white answer, it depends where you are in the cycle. If you’re in a bear market but it’s been going on for a long time and everybody in the market thinks the market will keep going down forever, that is usually an easier time to find undervalued stocks than say the peak of a 9 year bull market such as earlier this year. I don’t know if there are any statistics on this specifically, that would be pretty hard to quantify. It has been proven that if you buy stocks trading at lower P/E multiples your return will on average (I don’t remember the time horizon for the returns but I think it was 1 year) be better than buying them at high multiples, and most stocks will trade at lower multiples in a bear market.
Depends on the drivers as well. It's easy to think a bear market will be more undervalued since prices are dropping but if they're dropping because the overall economy is in a recession then it's likely that earnings, or at least revenue, is falling in tune to the price. So this means valuations are going to be flatter. Likewise, an exuberant run up like the late 90s or 1920s means only prices are rising instead of the slow buildup, like post WW2, where the economy was growing naturally.
To be honest, I like Shkreli's view that out of 10 companies 1 is over, 1 is under, the rest are even. Obviously it's a bit of an extreme example and "even" could mean within +/-20% which for some people is worthwhile and others not, but it gets the idea across.
What about when the stock market enters a downturn but the economic fundamentals remain strong?
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