Current Market Valuation: Overvalued

We believe in fundamental valuation analysis as the basis of any investment, and made CMV as a resource to quickly and easily track long-term indicators of market valuation. These are presented with background and analysis to be accessible and educational for retail investors.

June 18, 2021: Our models average 1.6 standard deviations above trend, indicating S&P500 is Overvalued.

Core Valuation Models

We currently track five 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. Models are updated weekly, or as data becomes available.


Yield Curve Model: Fairly Valued

Updated May 28, 2021 » 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, and recessions correlate with lower stock market returns. 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 »

Buffett Indicator Model: Strongly Overvalued

Updated June 17, 2021 » 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. It is currently at 232%, which is 86% (~2.8 standard deviations) higher than its historical trend line, indicating the market is currently Strongly Overvalued.

More Info: Buffett Indicator »

P/E Ratio Model: Strongly Overvalued

Updated June 18, 2021 » 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 36.4, which is 85% above the modern-era market average of 19.6, putting the current P/E over 2 standard deviations above the average. This indicates that the market is Strongly Overvalued.

More Info: Price/Earnings »

Mean Reversion Model: Strongly Overvalued

Updated June 18, 2021 » The S&P500 is currently trading 75% above its modern-era historical trendline, indicating that the market is Strongly Overvalued.

More Info: S&P Mean Reversion »

Interest Rate Model: Fairly Valued

Updated June 18, 2021 » The 10Y Treasury bond rate is 1.57%, which is 1.5 standard deviations below normal, indicating stocks should be high. Likewise, the S&P500 value of $4,166 is 2.2 standard deviations above its own respective trendline. Summed together, this gives a composite value of 0.7 standard deviations above normal, indicating that stocks are currently Fairly Valued when considering current interest rates.

More Info: Interest Rate Model »


Posts

Shorter form blog-style posts on various stock/economy related topics, but not limited to market valuation. These are generally not updated after they are posted.


Junk Bond Yields

March 2021

Junk Bond Yields

Junk bond yields are currently at historic lows.


S&P500 Mean Reversion Chart

February 2021

Fed Balance Sheet vs. S&P500

A look at the recent expansion of the Federal Reserve balance sheet, and its correlation with recent stock performance.


Federal Student Loans Outstanding Chart

September 2020

Federal Student Loan Crisis

Data exploring the exponential growth of unbankruptable federal student debt in the last twenty years.