By Mark Hulbert
A monthly review of stock market valuation indicators
Might there be a way to wriggle out from underneath the bearish message of the stock market's overvaluation?
Tantalizing as this possibility might be, it does seem remote. Take the Cyclically-Adjusted Price Earnings (CAPE) ratio, for example, which was made famous by Yale University finance professor (and Nobel laureate) Robert Shiller. It has one of the best historical track records when forecasting the stock market's subsequent 10-year real total return, and its current level is higher than 95% of monthly readings since 1881. The only higher readings occurred at the market top in late 2021 and at the top of the internet bubble.
Those are ominous parallels.
One tack that some bulls have nevertheless taken to try to sidestep these bearish precedents is to argue that, because stock market valuations have risen steadily over the decades, high current readings are not particularly unusual. This argument does have some superficial plausibility, as you can see from the accompanying chart of the CAPE ratio since 1881. Though the ratio's arithmetic average over the last 140 years is 17.4, a trend line that best fits the historical data currently stands at 23.5. So relative to the long-term trend, the CAPE is "just" 46% overvalued-in contrast to 97% overvalued relative to its long-term average.
That's a significant improvement, to be sure, but still leaves the market significantly overvalued right now.
But there is an additional problem with the bulls' insistence that the current CAPE be compared with its long-term trend line: The slope of that trend line depends crucially on how far back you go. There is nothing theoretically justified about 1881 more than any other, and had another starting year been chosen the conclusion you'd reach could either be more or less favorable to the bulls.
How valuation models stack up currently
It's because there are any of a number of possible starting points for historical comparisons that the table at the end of this column-which is updated monthly in this space-focuses on three periods for historical comparison: The last 30+ years (to 1990), the last 50+ years (to 1970), and the last 70+ years (to 1950).
As you can see in the table, all of the indicators that I regularly update show the market to be significantly overvalued, regardless of the time period over which the valuation is judged.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
-Mark Hulbert
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02-27-24 1051ET
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