Seven Metrics That Show The U.S. Stock Market Is Overvalued by George Athanassakos, The Globe And Mail
First, the ratio of Wilshire Total Market Index to US GDP, Warren Buffett’s favourite, shows that the market is overvalued by 44 per cent. The ratio currently stands at 119 per cent versus a historical average of 82.5 per cent.
Second, the relative valuation of the equity market in relation to the bond market shows that the stock market is undervalued in relation to the bond market by 22 per cent. The earnings yield (the inverse of the PE ratio) exceeds the bond yield by 360 basis points. The long-term average is 280 basis points.
Third, the price to forward earnings ratio shows that the market is overvalued by 8 per cent. This ratio currently stands at 16.8 times vs. its historical average of 15.5 per cent.
Fourth, the cyclically adjusted price to earnings ratio (CAPE) that Nobel Prize winner Bob Shiller has developed, which uses the 10-year smoothed, inflation adjusted earnings, shows that the market is overvalued by 52 per cent. The ratio currently stands at 25.2 times versus a historic average of 16.6 times.
Fifth, the price to book value ratio shows that the market is overvalued by 17 per cent. This ratio currently stands at 2.8 times vs a historical average of 2.4 times.
Sixth, price to cash flow ratio shows that the market is overvalued by 6 per cent. This ratio stands at 12.5 times vs a historical average of 11.8 per cent since 2000.
Finally, the ratio of annual forward dividend to price (dividend yield) shows that the market is overvalued by 48 per cent. This metric currently stands at 2.10 per cent vs. a historical average of 3.1 per cent. This is calculated as dividend divided by price. So the higher the price, the lower the ratio and the greater the market is overvalued.
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