Is the Stock Market Overvalued?

From a longer term investment viewpoint, you want to invest when markets are not overpriced. The median Price to Earnings ratio for the SP500 is 17.9. At the time or writing, it's over 28. Stock Market valuation and performance can factor into a Dollar/Pound cost average strategy by limiting position sizes at high P/E values.

Asset Class Returns

It is always pretty interesting from a globally diversified portfolio perspective, to keep track of the previous and current year asset class returns. The Blackrock page below provides this information and can help us gain more insight into the overall picture...

• Blackrock Asset Return Map

Country & Region Performance

MSCI Is the leading provider of stock market indices from which many globally diversified funds are built. The real time MSCI chart in the link below provides a very convenient and clear snapshot of the daily and "Year To Date" performance of all world regional stock markets

• MSCI REGIONAL & GLOBAL Real Time Performance

We are more interested in the broader regional markets but you may have country based funds/ETF's so you can check stock market performance at those levels from here...

• MSCI REGIONAL & GLOBAL

To see the MSCI World index and MSCI World Index ex-US price charts check out the links below...

• MSCI World Index

• MSCI World Index ex-US

This enthusiast site is packed full of various charts for markets and sectors. The international line chart for each country shows the general trend for our globally diversified funds:-

• AIOLUX - International

• AIOLOUX - Benchmarks

Current Stock Market Valuation

Stock market prices and valuation tend to 'revert to the mean'. Market valuations determine their likely future direction. If valuations have strayed too far above the mean it much more likely to see a decline back to the 'mean' valuation (or 'fair price'), and vice versa...  If market valuation is low then in theory, it's a better time to buy as there is a greater probability of prices rising.

The following link will take you to an excellent market valuation website (based on US equities) that calculates an aggregate index of the main market valuation models. This index represents an objective measure of whether markets are currently overvalued or undervalued...

Current Market Valuation (the homepage dial shows the current value of the index)

Professor Robert Shiller’s famous CAPE ratio is of the most well know indicators of when a stock or stock market, is over-valued. The CAPE ratio is the Cyclically Adjusted Price to Earnings ratio which averages out the standard PE ratio which is usually stated as the PE over the previous year. This smoothes out anomalies and provides a clearer signal. When the CAPE rises above 20, it’s time to start taking issue. At the time of writing the current CAPE for the US stock market is just over 38. This dwarfs the CAPE as it was just before the Financial Crisis 2008, but is still below the CAPE just before the 2000 crash.

The ‘Current Market Valuation’ button below will open up a browser tab to a great little website showing the best indicators or measures for stock market valuation. It then combines them to give an overall assessment of whether the stock markets are over, under or fairly priced. At the time of writing, not all of them are saying the markets are over-priced, although it’s hard not to think those measures are flawed in some way. (Who could really say that Buffet is plain wrong?)

CAPE RATIOS BY COUNTRY

CURRENT MARKET VALUATION

The Shiller Excess CAPE Yield is a new measure Shiller came up with to take low interest rates into account. This measure shows that the current US equity market is about average and not overpriced as nominal measures above suggest, but again what happens when low interest rates turn into high interest rates? (or even ‘normal’ interest rates).

The US stock market is generally considered to be overvalued and the analysis above backs this up with a good deal of research. As we are invested in a globally diversified ‘core’ fund/portfolio, then we are interested when the biggest stock market in the world (the US) is overvalued. Vigilance is required in order to decide if we want to rebalance, trim, reduce risk or even get out of the markets in extraordinary circumstances.

So, now we’re at the mercy of those pesky central bankers aren’t we. Any attempt to ‘normalise’ interest rates would be matched by a sell-off and likely sharp market declines. In addition to these interest rate changes, ‘tapering’ the Quantitative Easing (QE) program (central bank bond-buying / asset-purchasing / basically printing money from thin air) could also see market pullbacks and corrections.

After the extraordinary measures taken as a result of the Coronavirus pandemic central banks are almost certain to begin ‘tapering’ QE and may also be forced to raise interest rates at the same time to curb inflation which is stubbornly high.

Are Stock Markets Over-priced? What are the expected returns?

Cyclically Adjusted PE Ratio (CAPE Ratio) shows that, in nominal terms, the stock markets are overvalued… US CLICK HERE (new tab) and by Country CLICK HERE

This is a fantastic free resource valuing stock markets with the best-known valuation models. At the time of writing, It is clear that stock markets are over-valued but according to this resource, not when low-interest rates are accounted for. This just goes to show how important even small rises in interest rates will be to the value of your investments… CLICK HERE (new tab).

Even if low-interest rates can ‘explain away’ the high stock market valuations, it is still the case that the markets have shot up over the past year with interest rates changing. The following link shows the CAPE (see above) shooting up over the past year… CLICK HERE (new tab). By Country CLICK HERE (new tab)

Last but certainly not least, kudos to Blackrock for the resource below revealing their take on asset return expectations over time periods from 5 years to 30 years. This gives us more awareness about standard projections of returns. What it doesn’t do is help us detect crashes and the like. The Crash Dashboard in this blog is my stab at detecting corrections.

ASSET RETURN EXPECTATIONS

The Shiller Excess CAPE Yield is a new measure Shiller came up with to take low interest rates into account. This measure shows that the current US equity market is about average and not overpriced as nominal measures above suggest, but again what happens when low interest rates turn into high interest rates? (or even ‘normal’ interest rates).

The US stock market is generally considered to be overvalued and the analysis above backs this up with a good deal of research. As we are invested in a globally diversified ‘core’ fund/portfolio, then we are interested when the biggest stock market in the world (the US) is overvalued. Vigilance is required in order to decide if we want to rebalance, trim, reduce risk or even get out of the markets in extraordinary circumstances.

So, now we’re at the mercy of those pesky central bankers aren’t we. Any attempt to ‘normalise’ interest rates would be matched by a sell-off and likely sharp market declines. In addition to these interest rate changes, ‘tapering’ the Quantitative Easing (QE) program (central bank bond-buying / asset-purchasing / basically printing money from thin air) could also see market pullbacks and corrections.

After the extraordinary measures taken as a result of the Coronavirus pandemic central banks are almost certain to begin ‘tapering’ QE and may also be forced to raise interest rates at the same time to curb inflation which is stubbornly high.

An ETF Barometer for Market Sectors

Click Here for an interesting link showing the best performing ETF’s and which sectors they are in. At the time of writing Green tech, Cannabis and Commodities feature heavily at the top of the tree, Are they still there?