Saturday, January 18, 2020

Stocks Overvalued: Three Indicators at Record Levels

The SPY ETF, which tracks the S&P 500 reached new highs. This is a weekly chart, beginning in 2011.

PEG Ratio

The price-earnings to growth ratio, commonly called the PEG ratio, sits at its highest level since Bank of America started tracking the data in 1986. What investors are willing to pay for stocks relative to their long-term earnings growth expectations is at an all-time high, according to Bank of America.

The price-earnings to growth ratio, commonly called the PEG ratio, sits at 1.8, its highest level since the firm started tracking in 1986.

“We have pulled forward some of the gains from later this year, and could see some multiple compression,” the firm’s equity and quant strategist Savita Subramanian said in a note to clients Thursday.

The current simple price-to-earnings ratio is at 18.4 times, hitting a level the ratio hasn’t seen since 2002.

Shiller PE ratio for the S&P 500.

This is the price earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), or Shiller PE Ratio.

It's currently at 31.84. It's only been higher twice since 1880.

The Buffet Indicator

As of Jan 17, 2020, the Total Market Index is at $33,534.2 billion, which is about 155.7% of the last reported GDP. The US stock market is positioned for an average annualized return of -3.1%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 1.71%.

As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”

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