Indicators of Stock Market Over-Valuation are Flashing Red
June 18, 2018
Two widely followed indicators of U. S. stock market valuation are both near all-time highs, signaling that stocks are extremely expensive.
The Cyclically Adjusted Price Earnings (CAPE) ratio utilizes the inflation-adjusted ten-year average earnings to adjust the cyclicality of earnings. Currently, the CAPE is at 33, higher than it was at the peak in 1929. The only time it has been higher was during the dot.com bubble.
The Total Market Cap/Gross Domestic Product (TMC/GDP) measures the size of the stock market compared to the total size of the U.S. economy. Currently, the ratio is 145%, the second highest level ever recorded.
These measures of stock market valuation do not pinpoint the timing of market sell-offs. Stocks can remain over-valued and can continue to move up for extended periods. These indicators should be used to gauge the potential severity of a market correction.