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3 Things 10-9-23

Thing One


Is The Stock Market Overvalued?


According to Kirk Spano, who writes for Seeking Alpha:


“The S&P 500 is overvalued by every valuation metric measured…and…while the market can remain irrational a long time, it cannot sustain record valuations forever...”


A look at one of the most traditional valuation metrics, the P/E ratio for the S&P 500, suggests that Mr. Spano is at least right on that score. Before looking at the details, a definition of terms is in order.  Simply put, the P/E ratio calculates how long it would take, in theory, and in a company that returned all its profits each year to its investors, for a shareholder to recoup his initial investment.  In a simple example, assume a person buys 1 share of stock for $100 in a company that earns $10 per year.  The P/E ratio of 10 for that company (the $100 price divided by the $10 annual profit per year) would suggest that it would take 10 years for that person to recoup their initial investment. 


The current S&P500 10-year P/E Ratio is 28.9 while the modern-era market average P/E is 20.2. This suggests the stock market is overvalued. But, as you may have noticed, stock prices have come down lately. As to why, there are all kinds of theories, but one good one comes from the writers at who say:


“…The proverbial elephant in the room here is the bond market, expressed as interest rates. Very generally speaking, bonds represent a lower-risk asset as an alternative to equity (stock) markets, and the two have a highly interdependent relationship.


The 50,000ft overview on interest rates is as follows:


When interest rates are high, bonds pay a high return to investors, which lowers demand (and prices) of the riskier equities. Additionally, higher interest rates mean it's more expensive for businesses to borrow money, making it harder to borrow cash as a way to finance growth. Which is to say any business that takes on debt will face relatively higher interest payments, and therefore less profits. And again, less profits means lower stock prices.


The corollary to all this is also true. Low interest rates mean bonds pay less to investors, which lowers demand for them, which raises stock prices in relation to bonds. Low-interest rates make it easy for corporations to borrow cash cheaply to finance growth. Corporate interest payments will be low, making profits high. This is all to say, if interest rates are high, stocks go down. If interest rates are low, stocks go up…”


Until March of 2022, we had been living in the corollary scenario, with historically low-interest rates, for a historically long time.  High stock prices were reflective of that.  Now, as we said earlier, stock prices are coming down a bit and the market is a bit unsettled. This has all happened before and it will all happen again. And, because we want to sound like a broken record on this point, we’ll say again that a long-term outlook is priority-one for all prudent investors.


Thing Two


Do You Need An Umbrella Insurance Policy?


Umbrella insurance isn't required by law but is most often purchased by people who have a lot of assets to protect or a high chance of being sued. Per, it might be worth purchasing umbrella insurance coverage if you:


  • Own property.

  • Have significant savings or other assets.

  • Are worried about liability claims against you when traveling outside the U.S.

  • Own things that can lead to injury lawsuits such as pools, trampolines, guns or dogs (check with your insurer to make sure your breed is covered).

  • Are a landlord.

  • Have an inexperienced driver in your household.

  • Coach kids’ sports.

  • Frequently host parties in your home.

  • Serve on the board of a nonprofit.

  • Regularly post reviews of products and businesses.

  • Participate in sports where you could easily injure others (such as hunting, skiing or surfing).

  • Are a public figure.


Umbrella policies typically start at 1 million dollars worth of coverage and providers of these policies require the applicants to have existing liability limits on their auto and home policies at the high end of the range (usually a minimum of $250,000/$500,000/$100,000 on auto and $300,000 on home).  The liability coverage under an umbrella policy kicks in when the limits of the underlying policy have been exhausted.


To qualify for a policy, an applicant must have a relatively clean driving record and a low overall claims history.  That and the fact that the premiums for the underlying insurance can potentially be higher are the downsides to umbrella policy ownership. 


The upside is that the policies are a relatively inexpensive way to buy peace of mind.  They cost roughly $150 to $350 (on average) per year for the first million dollars of coverage and about $100 per additional million dollars of coverage above that.  Usually, they are sold by either the provider of your current home or auto policy, but there are also a few stand-alone providers who will consider selling you one provided you have the high liability limits and clean records mentioned above.


Here’s one final point to consider. In the excerpt above, it was stated that those with significant savings or high assets should consider umbrella policies.  It’s worth noting that while certain retirement accounts/assets like 401k, 403b, and pensions are protected from lawsuits by the Employee Retirement Income Security Act of 1974 (ERISA), traditional IRAs don’t have the same protection under that law so they may be vulnerable under certain circumstances.  That’s as good a reason as any to carry an umbrella on a sunny day.

Thing Three


Just A Thought


"Everything is habit-forming, so make sure what you do is what you want to be doing." - Wilt Chamberlain


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