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Is the share market cheap or expensive?

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Many investors should be asking themselves whether the share market is expensive or cheap these days.

The problem is that it could either at this point due to how low interest rates are.

As Magellan Financial Group Ltd’s (ASX: MFG) Hamish Douglass said to the Australian Financial Review, it depends about what happens to interest rates over the coming years that decides whether today’s prices are expensive or not. If interest rates go up, shares are expensive. If interest rates go down or stay flat for a long time, shares are cheap.

Economists may well point out that the last decade has been a very abnormal time for interest rates – they have been low for such a long time. But what you have to consider is what would actually get them back up to 3% or higher?

The US Federal Reserve hasn’t managed to stay at its current (still low) rate for long and there is already a large expectation that it will drop again this year. The RBA, currently at 1%, also faces a large task to get interest rates back up to 2% or higher.

Just look at Europe’s interest rates. Look at Japan’s interest rate which has been extremely low for two decades. Perhaps the rest of the western world faces a similar fate as Japan? Low growth and low interest rates for years to come?

If the world is entering a low interest rate for the long-term then that can have a wide-ranging effect on various industries like mortgage lending for banks such as Commonwealth Bank of Australia (ASX: CBA).

Foolish takeaway

The problem for all of us is that the future is unknown. We don’t know what’s going to happen next. That’s why I think it’s important we stay largely fully invested in good quality shares that can keep growing profit regardless of what the interest rate is.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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