Question

Based on what is happening in the markets today do you feel that bonds and stocks are either over- or under-valued? Conduct research on the web to this effect. Relate your thoughts to the fundamental "valuation" concepts discussed in the readings for bonds and stocks.

Answer 1

I feel that stocks in today's contemporary markets are highly overvalued and they do not have the fundamental supporting their valuations because they have ran ahead of the fundamentals as we can see that people are discounting the earnings of futures in the current stock price even if the current economic situation is signalling towards an impending recession and the stocks in the economy are almost hitting 52 week high daily so it is driven on the Liquidity, not valuations and these are overvalued and this cannot be sustainable over a longer period of time because ultimately there will be a main divergent back to the historic valuations.

Bonds are undervalued in current situation because they are not appropriately valued according to the current economic situation as we can see that there is a high level of uncertainty regarding vaccine and economic recovery but bonds are not providing with the recovery in their return and they are infact falling more than the before, so they are highly undervalued and once the economy is going to discount the current situation than these defences assets are going to provide a handsome rate of return.

The intrinsic valuations of stocks are very lower and if we are discounting the current economic scenarios and the lower growth rate in the economy than the sales and the revenues along with the profitability of the companies are going to be lower but the stock prices are running on the high optimism of recovery in the market and liquidity which has been fuelled by the Federal Reserve interest rate cutting which cannot be sustainable if there is no fundamental economic recovery as liquidity cannot drive the market for longer period of time and when there will be a collapse, there would be a destruction of wealth all over the place so one should be highly sceptical about the valuation of the stocks and they should be rather investing upon the bonds as they are providing with the better chances of higher rate of return.