Current Market Valuation: Strongly Overvalued

As a result of the market crash in Feb/Mar 2020 and the subsequent rally back near market highs, we consider the current market Strongly Overvalued. The Yield Curve still suggests, and data has made very clear, that we are speeding toward a massive recession, and valuation models show that we are far above a sustainable value, when looking at relative historical performance.

While we hope that these models will be useful in putting this current market cycle into historical perspective, we do not make a claim that these will predict the market top or bottom. A global pandemic of this scale, combined with the economic depression that could follow, are unprecedented and markets may deviate materially from these historical trends.


Summary


We currently track four different models to evaluate whether the US stock market is accurately priced, relative to long-term historical patterns and fundamental indicators. Each model is illustrated below, with much more detail available by clicking into each.


Individual Models


Yield Curve Model: Strongly Overvalued

Updated Apr 30, 2020 » The spread between 10-Year and 3-Month US Government debt was recently negative, illustrating an inverted yield curve. Historically, this has been a very reliable indicator of a recession in the following ~12-24 months after inversion. The last time this happened was 2006, right before the financial crisis. Before that: 2000, before the .com bust. In the last 50 years this indicator hasn't been wrong.

More Info: Yield Curve »
Yield Curve Chart

Buffett Indicator Model: Strongly Overvalued

Updated May 28, 2020 » The Buffett Indicator (named after Warren Buffett, who claims this as a favorite macroeconomic indicator) is the ratio of total US stock market valuation to GDP. This is currently 68% higher than its historical average, indicating the market is currently Strongly Overvalued.

More Info: Buffett Indicator »
Buffett Indicator Chart

P/E Ratio Model: Overvalued

Updated May 29, 2020 » The P/E ratio is a fundamental measure of any security's valuation, indicating how many years of current profits it takes to recoup an investment. The aggregate S&P500 P/E (CAPE) ratio is 28.43, which is 45% above the modern-era market average of 19.6, putting the current P/E over 1 standard deviation above the average. This indicates that the market is Overvalued.

More Info: Price/Earnings »
P/E Ratio Chart

S&P500 Mean Regression Model: Overvalued

Updated May 29, 2020 » The S&P500 is currently trading 35% above its modern-era historical trendlin, indicating that the market is Overvalued.

More Info: S&P Mean Regression »
S&P500 Mean Reversion Chart