But if the bond market rallies or the earnings outlook improves, stocks could quickly become a compelling buy. On the other hand, even if stocks are fairly valued, that doesn't mean they won't get even cheaper. Typically, when you get into a downturn, the pendulum swings to an extreme and stocks become undervalued. Even those who consider the market pricey are finding stocks to buy. Using a model that calculates the market's intrinsic value, stocks were 45 percent to 50 percent overvalued at last year's market peak, says Charles Lee, a finance and accounting professor at Cornell University's Johnson Graduate School of Management.
Value stocks look cheap, while technology stocks still look expensive.
Dividend yields are a measly 1.3 percent, far below the 4 percent historical average. But stocks aren't as overvalued as those figures suggest, because companies have become more parsimonious in paying dividends. Unless management messes up royally, today's retained earnings should lead to faster growth in earnings per share, as the money is used to expand business and buy back shares. Moreover, growth stocks have been hit so hard that their three, five and 10-year returns are now below those for value stocks. Last year's heady expectations have been replaced by pervasive gloom.