Are stocks over-valued? Is it time for caution? In this post we will discuss the efficacy of two commonly used stock valuation ratios. In other words, can they be trusted to predict a market top? First, here's an overview of the current level of domestic stocks.
Based on daily closing values through November 6, 2019, the S&P 500 Index reached an all-time high this past Monday, November 4. The Dow and Nasdaq Composite peaked a day later. These bellwether indexes are doing well with the help of strong economic data and a renewed optimism on trade. Are stocks over-valued?
Stock Market Valuation
Stock valuation ratios are designed to help determine the extent of the over- or undervaluation of U.S. stocks, in the aggregate. We will look at the Shiller CAPE Ratio and the stock-market-cap-to-GDP-ratio (SMC-GDP).
Shiller CAPE Ratio
The Shiller CAPE Ratio goes back the farthest, dating to the late 1800s. For more on this ratio, click here. Here are some past readings when the market was at, or near a top.
- September 1929: The CAPE ratio rose to 32.56. The Dow peaked the same month.
- December 1999: The CAPE hit an all-time high of 44.2. The Dow peaked at 11,722.98 the following month, January 14, 2000.
- January 2018: The CAPE reached 33.1. The Dow reached a record high of 26,616.71 on Jan. 26.
Currently, the CAPE stands at 28.95, well above its long-term average of 16.98.
