Our View of the Market Entering 2006
There are bargains, just not a lot of them.
As an astute investor, whenever you read the words "Economists predict that ..." you know to skip to the next article. Predicting anything as complex as the economy, whether one focuses on interest rates, the stock market, or next month's inflation figure, is an exercise in futility. And the more confidence an expert has in her macro prediction, the less credence you should put in it. Experts in any field tend to exhibit more confidence than the facts--or their own track records--justify.
So how can Morningstar have a view of the stock market? What we mean by "view" isn't a prediction of what the market will return in 2006. We don't know. Instead, what we mean is an opinion on the valuation of individual stocks--as embedded in our fair value estimates. Our analysts estimate these fair values one stock at a time, but we can roll these fair values up to tell us something about the valuation of the market overall. (For an excellent application of this approach, see my colleague Ryan Batchelor's article "What We Think the Dow Is Worth.") Our analysts now cover 1,700 stocks, so we think we have a pretty good idea of how the market, and various sectors of the market, are currently valued.
Haywood Kelly, CFA has a position in the following securities mentioned above: BRK.B, JNJ, APOL, EXPE. Find out about Morningstar’s editorial policies.