Eight valuation models suggest that even after recent declines, the stock market isn’t a good value
The sobering news is that even at its lowest point in mid-May, the S&P 500 index wasn’t even close to being undervalued according to any of eight valuation models that my research shows have the best long-term track records.

The recent bounce in the S&P 500—up 5.3% since May 19—could be just a passing bear-market rally, or it could be a new bull-market leg.

But if it proves to be the latter, it is all but certain that factors other than undervaluation are helping drive stocks higher.



The eight valuation indicators that have proved best at predicting 10-year returns, inflation-adjusted, for the stock market are a subject I have covered before. And while it is possible that other valuation models exist that are just as good at predicting bull markets, I haven’t discovered any.

On balance, these eight indicators at the mid-May low stood at more than twice the average valuation of the bear-market bottoms seen in the past 50 years. And, seen in comparison with all monthly readings of the past 50 years, the average of the eight measurements was in the 88th percentile.



Another perspective is gained by comparing the CAPE’s reading at the May low with all monthly readings over the past 50 years. Even at the recent low, the CAPE was in the 95th percentile of all results—more overvalued than 95% of all the other months over the past 50 years.
This message of extreme overvaluation isn’t easily dismissed, since the CAPE ratio has an impressive record predicting the stock market’s 10-year return. You can see that when looking at a statistic known as the R-squared, which ranges from 0% to 100% and measures the degree to which one data series explains or predicts another. When measured over the past 50 years, according to my firm’s analysis, the CAPE’s R-squared is 52%, which is very significant at the 95% confidence level that statisticians often use when determining if a correlation is genuine.

Many nevertheless reject the CAPE for various reasons. Some argue that the ratio needs to be adjusted to take into account today’s interest rates which, though higher than they were a year ago, are still low by historical standards. Others contend that accounting changes make earnings calculations from previous decades incomparable with today’s.

Still, the same bearish signals are being sent out by the other seven indicators that my firm’s research has found to have impressive stock-market forecasting abilities, and those indicators are based on different criteria.

Valuations at stock market's mid-May low

Most overvalued reading of past 50 years

Percentile of reading at stock market’s mid-May low, relative to distribution of monthly readings over the past 50 years

Most undervalued reading of past 50 years

P/E ratio

Average investor equity allocation

Q ratio

Buffett ratio

Dividend yield

Price/sales ratio

Price/book ratio

CAPE Ratio

0

10

20

30

40

50

60

70

80

90

100

PERCENTILE

Source: Hulbert Ratings
Here are those seven indicators, listed from high to low in terms of their accuracy over the past 50 years at predicting the stock market’s subsequent 10-year return, and showing by how much each indicates that the stock market remains overvalued:

• Average investor equity allocation. This is calculated as the percentage of the average investor’s financial assets—equities, debt and cash—that is allocated to stocks. The Federal Reserve releases this data quarterly, and even then with a time lag, so there is no way of knowing where it stood on the day of the mid-May market low. But at the end of last year it was 68% higher than the average of the past 50 years’ bear-market bottoms, and at the 99th percentile of the 50-year distribution.

• Price-to-book ratio. This is the ratio of the S&P 500 to per-share book value, which is a measure of net worth. At the mid-May low, this indicator was 95% higher than it was at the past bear-market bottoms, and was in the 90th percentile of the distribution.

• Buffett Indicator. This is the ratio of the stock market’s total market capitalization to GDP. It is named for Berkshire Hathaway CEO Warren Buffett because, two decades ago, he said that the indicator is “probably the best single measure of where [stock market] valuations stand at any given moment.” At May’s market low, the Buffett Indicator was 145% higher than at the average of past bear-market lows, and at the 95th percentile of the historical distribution.

• Price-to-sales ratio. This is the ratio of the S&P 500 to per-share sales. At the mid-May low it was 162% higher than at the past 50 years’ bear-market bottoms, and at the 94th percentile of the historical distribution.

• Q ratio. This indicator is based on research conducted by the late James Tobin, the 1981 Nobel laureate in economics. It is the ratio of market value to the replacement cost of assets. At the mid-May low it was 142% higher than at the bottoms of the past 50 years’ bear markets, and in the 94th percentile of the historical distribution.

• Dividend yield. This is the ratio of dividends per share to the S&P 500’s level. It suggests that the stock market is 121% overvalued compared with the past 50 years’ bear-market lows, and in the 87th percentile of the 50-year distribution.

• P/E ratio. This is perhaps the most widely followed of valuation indicators, calculated by dividing the S&P 500 by component companies’ trailing 12 months’ earnings per share. It currently is 16% above its average level at the lows of the past 50 years’ bear markets, and at the 58th percentile of the distribution of monthly readings. (This average excludes the bear-market low in March 2009, when U.S. corporations on balance were barely profitable and the P/E ratio artificially skyrocketed to near infinity.)

Short-term inscrutable
It is worth emphasizing that these valuation indicators’ impressive track records are based on their abilities to forecast the stock market’s subsequent 10-year return. They are much less useful when predicting the stock market’s shorter-term gyrations. So it wouldn’t be inconsistent with the message of these indicators for the stock market to mount a powerful short-term rally.

Assuming the future is like the past, however, the path of least resistance for the stock market is to decline. Short-term rallies notwithstanding, odds are good that the stock market on balance will produce a below-average return over the next decade.

Mr. Hulbert is a columnist whose Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at reports@wsj.com.

LINK https://www.wsj.com/articles/s...=5&mod=WTRN#cxrecs_s

I use a simpler metric. What’s changing for the better economically?

As long as the price of gas remains artificially high to promote the change over to the green new deal and electric cars, we are screwed.

Energy goes into absolutely everything a human being does.

Will be in recession if not already before the election. Once people start losing jobs and the economy slows way down, we could very well look at a depression.

Equities might tick up after the elections, but I think they’ll continue to drop until that point and I don’t see any good news for 2023.

I’m holding a fair amount of cash. I’d rather take the inflation hit and not add the equities loss.

YTD
Dow -9.5%
NSDq -23%

I’ll start buying back in w $ cost AVG as the election years… At least that’s the current thinking.

No, not in my humble option. Not as a whole anyways. We have quite a ways to go. The real question for me is with the markets being manipulated more than ever. When will we get there?

How long till the public gets the real info on the housing/real estate market situation. In "real time" anyways. Not until it is way too late for the vast majority to do anything that would benefit them.

Anyone see the story about Zillow?

No matter how many times it is proven as folly, why do people still try to time the market?

The stock market is an inflation hedge. The value of stocks rises with inflation because the underlying assets and present value of future earnings also rise with inflation.

Keeping anything in cash now is silly with inflation at 8%. No bank or money market will pay 8% interest. Not even close.

Jumping in and out of the market is a losing proposition based on this alone, and even worse when you consider that the biggest gains in the market occur on only a few days a year, and missing them destroys your long term gains.

Keep investing always, and rebalance portfolios to target allocations regularly. Dollar cost averaging will do more for you in the long term than trying to time things.

quote:

Originally posted by Lefty Sig:
No matter how many times it is proven as folly, why do people still try to time the market?

The stock market is an inflation hedge. The value of stocks rises with inflation because the underlying assets and present value of future earnings also rise with inflation.

Keeping anything in cash now is silly with inflation at 8%. No bank or money market will pay 8% interest. Not even close.

Jumping in and out of the market is a losing proposition based on this alone, and even worse when you consider that the biggest gains in the market occur on only a few days a year, and missing them destroys your long term gains.

Keep investing always, and rebalance portfolios to target allocations regularly. Dollar cost averaging will do more for you in the long term than trying to time things.

You do you and I’ll do me.

I don’t think you understand how much money I’m managing. I didn’t say it was “all” cash. And if you want to go by that old trope and overgeneralization of not being able to understand economic up turns and downturns over time … Well I got nothing.

I’ll put it another way; would you like to have a half million or more in cash right now to buy discounts while equities are dropping in price?

^^ Yeah I was responding to the OP not to you.

Thanks for the thread. it gives me a pulse of where the market is. I'm still all in cash except for a few stocks in a taxable account. They're good stocks anyway for the long term - ABT and ABBV where my cost per share is about $30.

What's kept me out is that I'm still working on my Excel portfolio strategy file that will allow me to track which part is for which time horizon.

I'm with Signified, it's not about trying to time the market but when you see the ship going into a storm, it makes sense to batten down the hatches. People use the picture of selling at the bottom and missing on the uptick as an argument for timing the market. But if you sell as things are going south, you still have time to see the market go from the bottom to where you jumped off. At worst you saved yourself the heartache of riding all the way to the bottom.

quote:

Originally posted by Lefty Sig:
^^ Yeah I was responding to the OP not to you.

Fair enough… however when people talk about market timing it’s a broad brush generalization that misses a lot of details.

quote:

Originally posted by SIGnified:

quote:

Originally posted by Lefty Sig:
^^ Yeah I was responding to the OP not to you.

Fair enough… however when people talk about market timing it’s a broad brush generalization that misses a lot of details.

For a professional investor, fund manager, or hedge fund manager, it's a factor. Even so, the market does unpredictable and illogical things in the short term. Long term, valuations reflect fundamentals, because they have to. The vast number of morons "investing" in "crypto" with zero actual value simply because "it's going up!" have shown the illogic of the market, in the short term. When the long term hits, they cry "I lost everything!". Too bad, ask P.T. Barnum how things work.

For the average person with an IRA or a 401K, timing the market and chasing returns tends to reduce their returns significantly. To the point that they barely stay even. And this is being used as justification for the government to take over private retirement investments and manage them for us so we can get an "acceptable" return and they can confiscate the rest to pay off people who failed to plan.

I still stand by the fact that as long as energy prices remain as high as they are, even escalating and accelerating … Until that policy changes this country will not prosper, and the equities market will reflect it.

Energy is everything and every company needs it to produce anything.

I am finally ready to get into the market besides my annual 401k investment.
I'm a bit behind the curve age wise at 46. With around 75k to put in, my wife and I were thinking of putting in wife and I are planning to add it in $3000 a week starting in Sept. figuring there will be a bounce towards election time.

what are anyone's thoughts on this?

I cannot offer you specific financial advice other than to say the dollar cost averaging is a pretty good strategy.

Others would probably counsel you into specific equities/investments but I don’t do that.

My wife strongly wants me to get out of the market and get back in after it hits bottom. What a wonderful idea!

Sarcasm aside, while everything the OP said about the market may be true, it's not true about every stock that makes up the market. Look at this article for example, which discusses 20 stocks with better valuations than they had at the bottom of the last two bear markets:

https://www.marketwatch.com/st...-markets-11652700051

You do still have to delve deeper, though, like in this article discussing the previous article, in which they ask the question "why":

https://seekingalpha.com/artic...7854587978%5E%5E%5Eg

If we could predict market bottom and market top accurately we would all be billionaires.

Just like if we all invested in Apple and Microsoft back in the 70's, or if we bet 100K on the 80:1 odds for the winner of the Kentucky Derby this year.

Hindsight and all that.

Timing the market, picking stocks, FOMO, it's all folly. A broadly diversified market portfolio is the only thing that adequately balances risk and return. Optimizing asset allocation is the key.

Look at all the idiots that invested in "crypto" that are losing their shirts. That was 100% FOMO. Fools and money, departed sooner than they expected.

Honestlou - if your investment strategy is to follow the emotions of a female, God help you. That is a sure way to buy high and sell low, like the majority of retail investors...

The Market itself is emotional and that's why it's so hard to predict.

Timdog06, Same with me, but I am older than you

I would be careful and do so slowly and see how it goes.

I have little to no knowledge about buying individual stocks but have thought now-ish would be a good time to start to buy some of quality companies.

TDAmeritrade or similiar. Just put in at what price you want to buy them at and let their system do the work. I do not have the money you are talking to invest so I would like to pick maybe five stocks and buy some. Thoughts?

Still buying what I feel are a value in strong companies. No, it hasn't hit bottom yet

This message has been edited. Last edited by: BigSwede,

quote:

Originally posted by old rugged cross:
Timdog06, Same with me, but I am older than you

I would be careful and do so slowly and see how it goes.

I have little to no knowledge about buying individual stocks but have thought now-ish would be a good time to start to buy some of quality companies.

TDAmeritrade or similiar. Just put in at what price you want to buy them at and let their system do the work. I do not have the money you are talking to invest so I would like to pick maybe five stocks and buy some. Thoughts?

No. Individual stock picking incurs much higher risk relative to return. There is a ton of research supporting this. Even professionals that are paid to manage portfolios can't pick stocks reliably enough to beat the market long term, after you subtract all the management expenses.

The best and worst performing stocks in any time period are companies you never heard of, and would never know enough about to buy or sell. People tend to gravitate to companies they like, or a "tip" someone gave them, or chase returns assuming that previous performance leads to future performance. In effect, most people gamble instead of invest.

If you have enough money to buy enough shares to move the market price, then the game changes, which is what hedge funds do.

If you don't have that kind of money, a Vanguard Target Retirement fund (or equivalent) aligned to the year you turn 70 is fine and will provide good return while minimizing risk, and adjusting the asset allocation as a function of your planning horizon.

I don't believe were at bottom and undervalued depends on the stock (company) you might be thinking about IMHO.

Not recommending any stock or providing advice but for me, I have a cash position, I-Bonds, a few Vanguard ETF's, a few conservative Dividend and performance equities (e.g., Tobacco, Oil, TelCom) and, because I'm a fanboy of Costco, JP Morgan Chase, ABBV and Apple, have positions in them.

Mistakes, yup got em. I have a position in the ARKK ETF in which I've been handed my Ass and will holding that position until it recovers to some less embarrassing loss and that saying a lot for ARKK.

[
No. Individual stock picking incurs much higher risk relative to return. There is a ton of research supporting this. Even professionals that are paid to manage portfolios can't pick stocks reliably enough to beat the market long term, after you subtract all the management expenses.

The best and worst performing stocks in any time period are companies you never heard of, and would never know enough about to buy or sell. People tend to gravitate to companies they like, or a "tip" someone gave them, or chase returns assuming that previous performance leads to future performance. In effect, most people gamble instead of invest.

If you have enough money to buy enough shares to move the market price, then the game changes, which is what hedge funds do.

If you don't have that kind of money, a Vanguard Target Retirement fund (or equivalent) aligned to the year you turn 70 is fine and will provide good return while minimizing risk, and adjusting the asset allocation as a function of your planning horizon.[/QUOTE]


I understand this is not a good overall strategy for ones sole financial future.

That is not the purpose of doing so.

In an effort to be diversified feeling like it is another way to be so.

At this point just trying to curb the loss of inflation is a worthwhile venture.