Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Warning, The Stock Market Is Extremely Overvalued Right Now

Stock-Markets / Stock Index Trading Dec 10, 2009 - 12:25 AM GMT

By: DailyWealth


Best Financial Markets Analysis ArticleTom Dyson writes: Andrew Smithers is a world expert in stock market valuation...

Smithers is an "econometrician." He studies stock market statistics going back more than 100 years and creates indicators from these statistics to judge whether the stock market is cheap or expensive. His two favorite valuation indicators are named the "CAPE" and the "q."

CAPE stands for Cyclically Adjusted Price Earnings. You've heard of the price-to-earnings ratio. CAPE is like the P/E ratio, except it smoothes earnings over 10 years to take out the impact of booms and busts. CAPE data go back 127 years.

The q is a ratio of stock prices to asset values. You've heard of the price-to-book ratio. Book value is a company's "net worth" after you add up all the assets and subtract all the liabilities. The q is like the price-to-book ratio, except instead of book value, it uses the replacement cost of assets. Replacement cost is closer to reality than book value, as it reflects price inflation. Data for q go back to 1900.

In March 2000, Smithers and another economist, Stephen Wright, published a bestselling book titled Valuing Wall Street. In this book, they explained these indicators and used them to show the stock market was as much as 2.5 times overvalued at the end of 1998.

"The end of the twentieth century was almost certainly the very best time in the entire century to sell stocks," they concluded. The Nasdaq bubble collapsed the month their book arrived in bookstores.

Before the recent credit crunch, Smithers was sounding the alarm again...

In a January 2008 article, Smithers wrote, "Stock markets are vulnerable because they are overpriced... Investors should be aware that the downside potential for asset values looks far greater than the upside."

Right now, Smithers' indicators show the stock market is more than 40% overvalued. (At the most recent data point – September 17, 2009, when the S&P was at 1,069 – q showed the market was 41% overvalued and CAPE showed the market was 37% overvalued.)

At 40% overvalued, the market is the most overvalued it's ever been except for the peaks in 1929, 2000, and 2007.

"The S&P 500 is priced to deliver one of the weakest 10-year total returns in history except for the (ultimately disappointing) period since the mid-1990s," says Smithers.

To see a chart of the q and CAPE going back 100 years, click here.

Here's the thing that scares me: Smithers' ratios move like yo-yos around an average. Economists would call them "mean-reverting," meaning they bounce from overvalued to undervalued.

In 2000, both indicators hit extreme highs. Both were almost double the previous record stock-market overvaluation, recorded in 1929. This leads me to think we'll see extreme levels of undervaluation in these indicators at some point in the future.

If these indicators reach the same levels of undervaluation they hit at the market bottoms in 1921, 1932, 1949, or 1982, the S&P would need to fall to around 400...

In sum, you should be careful with the stock market right now. It's extremely overvalued from a historical perspective and there's the potential for a major decline in stock valuations over the next decade.

On the other hand, keep an eye on Smithers' chart. When the q and the CAPE fall below –0.4, this will be the moment to begin investing heavily in stocks again.

Good investing,


P.S. You should buy Smithers' book. It's one of the all-time great stock market books. I take it off my shelf at least four times a year. It's an easy read, written for the individual investor. You can find it on Amazon here. Or check out Smithers' website here.

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2009 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in