There are a lot of articles discussing data points which can help investors predict markets. Most have some value in them (though not all). In this vein, the Wall Street Journal has done some digging to assemble the eight best historical market signals. The first thing to know is that all eight predictors, each of which has a great track record, show that market returns over the next decade will be below average. Even the most bullish of the group says that returns will be way below what they have been over the last decade. Some of the eight predictors include the Household Equity Allocation, the Q Ratio, the Buffett Indicator, the CAPE, and the Dividend Yield. The Household Equity Allocation has historically been the most accurate, as households tend to have the highest allocation to stocks right before a crash.
FINSUM: That is quite a data set stacking up against the market. We expect a rough market and a recession within 18 months, but the gains until then could be good.
Are stocks grossly overvalued and ready to fall or are they in the middle of a bull market and headed higher? This article takes the former position, contending that stocks have gotten too richly valued. This piece takes an argument from a Raymond James strategist to say that stocks have gotten ahead of themselves, with bullish sentiment so high that it has consistently proved a contrarian indicator in the past. Shiller’s CAPE ratio has just hit a scary level too—30—a measure hit only twice in the last century. The first was in 1929 before the crash and the second was in 1997, on the way to the Dotcom crash.
FINSUM: The most interesting thing in this piece is that stocks kept rising for another couple years after 1997, hitting a 44 measure on the CAPE. That means there could still be a lot of money to be made. As ever, these historical insights only say so much, as the economic context is different now.
Investors look out, this Wall Street Journal article says that US stock markets are flashing a major warning sign. Valuations are getting to extreme levels, says the piece. Price-to-earnings ratios are currently high, but vary greatly. However, Shiller’s CAPE ratio is at very worrying levels, running at 27.1 versus a long-term average of 16. According to the WSJ, when valuations get to this level, “the S&P 500 subsequently averages about 4% annually for the next 10 years”. While the measure is not a good tool for market timing, it does show that returns might be poor in the future, which could be a big threat to pension funds which will rely on good returns to fund themselves.
FINSUM: This could be a big threat to US taxpayers, as if returns are poor for some time, it might fall to the public to fund pension liabilities.
Source: Wall Street Journal
Legendary stock market guru and Yale professor Robert Shiller is once again raising fears about US equity valuations. Despite the recent selloff, Shiller says his CAPE method indicates that equity prices are still too high. According to the piece, Shiller’s “valuation confidence indices”, which are based in investor surveys, are showing a “greater fear that the market was overvalued than at any time since the peak of the dotcom bubble in 2000”. Shiller admits that his valuation method is not capable of predicting timing, but he said “It looks to me a bit like a bubble again with essentially a tripling of stock prices since 2009 in just six years and at the same time people losing confidence in the valuation of the market”. However, Shiller said that he does not believe equity markets will have a strong reaction to Fed rate hikes, as they have been discussed for so long that they are “just not much of a big deal”.
FINSUM: It is interesting to see that Shiller is still so concerned about valuation considering the selloff of late, but that concern could indicate just how overvalued stocks truly are.
Source: Financial Times