U.S. stock market overvalued, headed for drop

Despite a flagging economy and growing indications of a weak recovery, U.S. stocks continue to climb at a steady clip. But analysts said the market is overvalued and headed for a drop.

Meredith Whitney, Chief Executive Officer of the Meredith Whitney advisory group, expressed pessimism about the market in an interview this week on CNBC, a cable TV network.

"I haven't been this bearish in a year," she said. "I look at the board and every single stock from Tiffany to Bank of America to Caterpillar is up. But there is no fundamental rooting as to why these names are up, particularly in the consumer space."

While the economy grew last quarter at a seasonally adjusted 3.5 percent from the previous quarter, many consumers are still feeling the sting of unemployment, which hit double digits in October for the first time since April 1983 and is expected to rise further. The underemployment rate -- a measure of part time workers who would prefer full-time work and people who have given up seeking work -- stood at 17.5 percent in October.

The housing market is still faring poorly and millions of homes are headed for foreclosure over the next few years, analysts said.

Also troubling is that the economy may be headed for a double dip recession in 2010, although it may not be as severe as last year's economic nose dive, Whitney said.

Those factors could bode ill for the market and many stocks are likely to return to "tangible book value," although they may avoid plunging to March levels, when the Dow Jones industrial average fell to lows not seen since 1997, she said.

Douglas Elliott, fellow at the Washington, D.C.-based Brookings Institution, tags the overvaluation at around 20 percent.

The market's recent rise can be traced back to March, when stocks tumbled due to a number of factors including concerns over the financial sector and the global economy.

But once it became clear that the downturn would stop short of becoming the next Great Depression, the market bounced back in oneof the strongest rallies in years.

Now it is in for another slide, once it catches up to all the negative indexes that indicate the economy will slog toward a recovery at a sluggish clip instead of bouncing right back to pre-recession levels, he said.

"So you are going to be looking at an unexciting (market) environment and one that is a bit scary," he said.


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