Current Market Valuation: Fairly Valued

Fundamental valuation analysis should be the basis of any long term investment. CMV is a resource to quickly and easily track long-term indicators of US stock market valuation, presented with background and analysis to be accessible and educational for retail investors.

Aggregate Index updated May 13, 2022

Market is
Fairly Valued
@ 0.46 std devs > trend
Aggregate index score is equally weighted average of core valuation models below. Models are updated at end of each week, or as data becomes available.

Core Valuation Models

Updated May 12, 2022

Yield Curve

Fairly Valued

The slope of the yield curve does not indicate expectations for a near-term recession.

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Updated May 13, 2022

Buffett Indicator

Overvalued

The ratio of the total US stock market value to US GDP is near all-time highs.

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Updated May 13, 2022

Price/Earnings Ratio

Overvalued

The 10-year price/earnings ratio of the S&P500 is significantly higher than the long term trend.

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Updated May 13, 2022

Interest Rates

Fairly Valued

The stock market is fairly priced when considering our historically low interest rates.

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Updated April 30, 2022

Margin Debt

Fairly Valued

The amount of debt investors take on to buy stocks is near all time highs.

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Updated May 13, 2022

Mean Reversion

Overvalued

The S&P500 has enjoyed a bull market since 2009 and is far above its historical growth trend.

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Other Posts

Periodic posts - not necessarily related to market valuation, and not tied to our core valuation rating.

Posted May 2022

The Impact of Narcissistic CEOs

White Paper Review: Narcissistic CEOs of public companies are shown empirically to be more likely to make adjustments to their firm's GAAP earnings. These adjustments are larger in scale, and lower in quality than adjustments made by non-narcisstic CEOs.

Posted March 2022

The Case for Transitory Inflation

As inflation continues upward, a look back at what caused it and the Fed's response going forward.

Posted November 2021

Inflation vs. Interest Rates

Inflation is skyrocketing - how long can interest rates stay so low?

Posted November 2021

S&P500 P/E Ratio vs. Interest Rates

The stock market may be low given strong corporate earnings versus super-low interest rates.

Posted July 2021

Fed Balance Sheet vs. S&P500

Fed spending (quantitative easing) has been rising. Does this prop up stocks? Raise inflation?

Posted March 2021

Junk Bonds

Junk bond rates are super low, particularly when compared to Treasuries.

Posted September 2020

Federal Student Loan Crisis

Student loan debt is absolutely out of control.

On The Radar

Timely links to external news and articles, usually valuation related, with occasional commentary. Most recent items shown below - for more, check the Radar page.

Thursday, 19 May 2022 How a Trash-Talking Crypto Founder Caused a $40 Billion Crash

Luna’s total value ballooned to more than $40 billion, creating a frenzy of excitement that swept up day traders and start-up founders, as well as wealthy investors.

Mr. Kwon dismissed concerns with a taunt: “I don’t debate the poor.”

Last week, falling crypto prices and challenging economic trends combined to create a panic in the markets. The price of Luna fell to nearly zero. As critics had predicted, the price of TerraUSD crashed in tandem, dropping from its $1 peg to as low as 11 cents this week. In a matter of days, the crypto ecosystem Mr. Kwon had built was essentially worthless.

Much of the pain of the collapse has ... been felt by regular traders. On a Reddit forum for Luna evangelists, users shared lists of suicide hotlines, as people who had poured their savings into Luna or TerraUSD expressed despair.

Retail investors saw are absolutly getting crushed by cyrpto pipe dreams, while primarily the already-rich are getting even richer from them. It is a zero-sum transfer of wealth from the poor and middle class to the wealthy.

Tuesday, 17 May 2022 All Cryptocurrency Should Die in a Fire

From an interview with Nicholas Weaver of UC Berkeley and the International Computer Science Institute:

Weaver:
You hear about people making money in Bitcoin or cryptocurrency. They only make money because some other sucker lost more. This is very different from the stock market.

I’m a savvy investor, and by “savvy investor,” I mean I put my money into index funds and ignore it for several years. During that time, there are dividends and share buybacks where the companies put their profits into me. I then eventually sell it to somebody else. And my gain is not just the difference between what I bought it for and what somebody else bought it for, but that plus the benefit of all the dividends and interest.

So the stock market and the bond market are a positive-sum game. There are more winners than losers. Cryptocurrency starts with zero-sum. So it starts with a world where there can be no more winning than losing. We have systems like this. It’s called the horse track. It’s called the casino. Cryptocurrency investing is really provably gambling in an economic sense. And then there’s designs where those power bills have to get paid somewhere. So instead of zero-sum, it becomes deeply negative-sum.

Effectively, then, the economic analogies are gambling and a Ponzi scheme. Because the profits that are given to the early investors are literally taken from the later investors. This is why I call the space overall, a “self-assembled” Ponzi scheme. There’s been no intent to make a Ponzi scheme. But due to its nature, that is the only thing it can be.

Sunday, 15 May 2022 Global Stock Slump May Not Be Over

But amid the morsels of value, the broader market looks to be buckling as recession creeps more and more into the conversation. And even as growth worries mount, the inflation focus at the Federal Reserve and other central banks means investors can’t count any more on the monetary elixir that’s helped to keep alive the long-running bull market.

I don't presume to know exactly what happens next. Maybe the market recovers from here? But looking at past market cycles, the large downturns that end bull markets tend to revert significantly below historical valuation trends. And per most models, we're not even close to that yet. So I would say that there is at least a very good chance that this downturn continues.

Thursday, 12 May 2022 The Market Is Wrong, Bro

Sure enough, it happened.

Between November 2020 and January 2021, GME's stock price exploded from $12 per share to more than $400. At its peak, GameStop was worth an astounding $22B.

Retail investors won. Several hedge funds suffered catastrophic losses, most notably Melvin Capital, which experienced a 53% drawdown in January 2021. Retail investors must have closed their positions to book million-dollar profits, right?

This is a pitch-perfect summary of confirmation bias and the shellacking that many new retail traders are taking this week.

Tuesday, 10 May 2022 Americans Put More on Credit Cards as Inflation Boosts Costs, Fed Data Show

A record 537 million credit card accounts were opened in the first quarter, a jump of 31 million over the past year, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit. Meantime, mortgage originations totaled $859 billion in the first three months of 2022, the lowest in nearly two years.

...

A separate report last week showed US consumer borrowing soared in March by the most on record as credit-card balances ballooned and non-revolving credit jumped, underscoring the combined impact of solid spending and rising prices. That’s a good sign in that spending is the largest contributor to the economy, but could be worrisome if Americans can’t keep up on payments.

This is an absolute train wreck.

Monday, 9 May 2022 Four Indicators to Watch

Four key indicators to pay attention to as our economy teeters.


Day Trader Army Loses All the Money It Made in Meme-Stock Era

Nursing losses in 2022 that are worse than the rest of the market’s, amateur investors who jumped in when the lockdown began have now given back all of their once-prodigious gains, according to an estimate by Morgan Stanley. The calculation is based on trades placed by new entrants since the start of 2020 and uses exchange and public price-feed data to tally overall profits and losses.

This comes as a huge surprise to literally no one. I hope Robinhood goes out of business.

Thursday, 5 May 2022 Cash Keeps Flowing Into ESG While Markets Tank

Even with the worst April slump in the S&P 500 since 1970, money keeps pouring into ESG-labeled funds at a seemingly unrelenting pace.

More than $1.2 billion went into ESG-focused exchange-traded funds last week as the S&P 500 dropped 3.8%, bringing the index’s full-month decline to 8.8% on concerns about inflation, rising interest rates and Russia’s war on Ukraine.

So far this year, ESG funds have attracted more than $22 billion, including almost $5 billion for U.S. offerings led by BlackRock Inc.-managed funds, according to data compiled by Bloomberg.

You love to see it.

Wednesday, 4 May 2022 Inflation-Indexed Treasury Bonds

Overiview of I bonds, which are quite in vouge now with 10% interest. The deets:

  • $10,000 max, per person, per year.
  • Currently paying 10%
  • Interest rate adjusts every six months
  • It's a 30-year bond. You can withdraw funds any time, but there is a small penalty if you do it prior to 5 years.
  • Risk-free
  • You need to open an account at treasurydirect.gov


The Fed Is Set to Pull Back Economic Help Rapidly. Is It Too Late?

The Fed chair, Jerome H. Powell, and his colleagues are expected to raise interest rates half a percentage point on Wednesday, which would be the largest increase since 2000. Officials have also signaled that they will release a plan for shrinking their $9 trillion balance sheet starting in June, a policy move that will further push up borrowing costs.

...

“In hindsight, there’s a really good chance that the Fed should have started tightening earlier,” said Karen Dynan, an economist at the Harvard Kennedy School and a former Treasury Department chief economist. “It was really hard to judge in real time.”

Tuesday, 3 May 2022 Too Many Bears

All this negativity and this spike in bearish sentiment makes me wanna buy equities with both hands. But alas, prudence requires a more thoughtful approach. Regardless of your desires, any one indicator by itself is rarely sufficient to drive a substantial change in portfolio allocations. There simply are too many moving parts to rely on a single variable.

Barry seem to think things are turning around...


The Amazon Economic Indicator Says Inflation Is Easing

On the most recent quarterly earnings conference call on Thursday, the company announced it has now built out the capacity it needed. It is even overstaffed with excess warehouse capacity, and plans to pull back on hiring and investing in the short term while it waits for demand to catch up.

This is probably the best leading indicator you can get that general inflationary pressures in the economy should begin easing over the next couple of quarters.

Monday, 2 May 2022 I’m sorry but more Twitter

It would help, in making that case, if Twitter’s board and managers had a long-term plan. What is strange here is that the richest person on earth came in out of the blue with a not-particularly-preemptive offer to buy a service that he is obsessed with and that seems crucial to his success. Hearing that, you might think things like “huh this product must be pretty valuable.” You might sit down and try to think of ways to extract value from it, other than selling it to Musk at the first price he proposed. Twitter’s board had no ideas.

Meanwhile you know who does? Elon Musk. Maybe? He seems to think that he can make Twitter worth more than $54.20 per share: He has publicly denied wanting to make money from this deal, but he has pitched his banks on how he will improve Twitter’s economics. Perhaps he is wrong, but he has a decent track record. And he just got here! He started buying Twitter stock this year, and declined to do any nonpublic due diligence. Some random interloper has a plan to make Twitter worth more than $54.20, and has bet $33 billion of his own money that it will work. Meanwhile Twitter was trading in the $60s in October and Twitter’s board cannot fathom ever getting it back to those levels. Their position is pretty much “well we destroyed some value for shareholders and we’re gonna go now, bye.”

But it is worse than that.

If you aren't reading Matt Levine's (free) daily column, you aren't living.


CNN Fear and Greed Indictor Updated

CNN's Fear & Greed market sentiment indicator was updated recently, and it's better than ever - a huge improvement in design and legibility. A great bookmark to check in on market momentum and sentiment.


Powell’s Fed Set to Go Big and Keep Going Until Inflation Tamed

The Fed chair and his colleagues want to lift rates expeditiously to a neutral level this year that neither stimulates nor restrains growth -- around 2.5% -- and then slow the pace of tightening.

But in crises, central banks that pause typically lose as the forces they’re battling -- be it spreading financial panic or broadening inflation -- gain more momentum.

A lot of these sentiment indicators seem to just be pointing straight down, sounds like we're in for an ugly Q2.

About

CMV is an educational resource on long term market valuation trends and theory, it is not trading advice. As these models themselves show, markets can diverge from fundamentals for many years. See more on the About page.