It's also important to consider what cheap really means for stocks. For value-driven investors who use the last five years as a look-back period, of course stocks look expensive today. Over that time period, stocks were bouncing back from absurd bear-market valuations.
When you're used to driving at 5 miles per hour, accelerating to 30 miles per hour seems pretty fast. But that doesn't mean that it's as fast as the car can go.
A Structural Rally
I mentioned earlier than so far we've largely been in a structural rally. So what does that mean exactly?Since late 2008, the Federal Reserve has undertaken a policy of quantitative easing that's poured money into the markets by the dump truck full. With Janet Yellen stepping up as the presumptive replacement for Ben Bernanke, that faucet of free money isn't likely to get shut off anytime soon. But then again, it wasn't really going to be shut off anyway. One result of "QEx" has been an everything rally. In short, stocks aren't the only asset class that's seen prices appreciate at a breakneck pace, it's just the only one that investors don't believe in right now. Since the market crash, fixed income and commodities have both rallied hard too. When everything's going up, it means one thing: the monetary base is expanding very quickly. Luckily for U.S. investors, everyone else has been printing money too. That, and the safe-haven designation of the U.S. markets, has saved the dollar from getting shellacked. But in this environment, stocks are the clear outperformer. >>5 Stocks Insiders Are Scooping Up Right now, investors are still overweight flight to quality investments like treasuries. But those investments are atrophying away under the low-rate, comparatively higher interest rate environment that we're currently knee-deep in. It doesn't take hyperinflation to create a toxic environment for low-risk assets, just negative real interest rates. Stocks may not be perfect, but when treasury investors can't take the pain anymore, they're going to have to turn to stocks again. When that happens, the flow of funds will send the stock rally moving in earnest. Looking back historically, the "Great Rotation" from safety investments to stocks has come between five and seven years after major market bottoms. That should make the next couple of years pretty interesting.