Economist Andrew Smithers Says S&P 40% Overvalued

Economist Andrew Smithers, who recommended investors sell their equity holdings in 2000, now believes that the S&P 500 is 40 overvalued. As central banks cut back on quantitative easing, he believes stock markets will come back down.

From a Bloomberg article:

“Markets are very vulnerable to an end of quantitative easing,” said Smithers, 72, who recommended avoiding stocks in 2000 just as the U.S. benchmark entered a two-year bear market. “Central banks, they’ve got to stop some time and if that happens everything will come down.”

As several articles on BestCashCow have pointed out, stock, oil, and gold prices have benefited greatly as the Fed has doubled its balance sheet to $2.1 trillion. That means that over the last six months, over $1 trillion dollars has been pumped into the economy. With all of that money sloshing around it's no surprise asset prices are increasing. At the same time, it helps explain the decline of the dollar.

“Quantitative easing has set off another sharp, and so far containable asset bubble,” Smithers said. “But if it gets too high and starts to come down then we’ll go straight back” into recession.

This contrasts with Smith's opinion in March 2009 as the market reached its low that it was unvervalued. In an interview with FT Advisor, he said at the time:

At the same time, however, he believes global markets are cheap. “At the end of last year, we thought markets around the world were something like 27 per cent undervalued. Now they’re getting to something like 45 per cent undervalued. We’re not a long way short of really, really good value,” he notes.

Smithers & Co is therefore advising its clients that as long as they intend to hold positions for longer than a couple of years, they will probably make money by buying now. Value is, after all, a sensible basis for a long-term market outlook. However, he believes markets will continue to fall, so investors will probably benefit from waiting a further six months before moving out of cash.

He obviously wasn't ready from the tidal wave of government and central bank cash that was about to lift all boats.