We track economic models highlighting the current state of the US stock market and broader economy.
This data is an educational resource to better understand market and business cycles. While these cycles often correlate well with stock performance, the analysis should not be used as a short term trading strategy. If you're looking for investment advice, you can find our perspective here.
Each of our models uses historical data to determine a baseline, and expresses current values in terms of the current data's number of standard deviations above or below that baseline trend. More information on model ratings is available here.
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Aggregate Market Value Index
Available only to members, this is our aggregate score of the current valuation of the US stock market.
See how the index correlates against future stock market returns.
Market Valuation Models
The Buffett Indicator Model: Strongly Overvalued
Updated September 30, 2024
Chart shows current Buffett Indicator value as # of standard deviations above/below historic average.
Summary: The Buffett Indicator is the ratio of the total value of the US stock market versus the most current measure of total GDP. When this value is very high it suggests the stock market is overpriced relative to actual economic productivity.
The Price/Earnings Model: Strongly Overvalued
Updated September 30, 2024
Chart shows current CAPE value as # of standard deviations above/below historic average.
Summary: The PE Ratio Model tracks the ratio of the total price of the US stock market versus the total average earnings of the market over the prior 10 years (aka the Cyclicly Adjusted PE or CAPE).
The Interest Rate Model: Overvalued
Updated September 30, 2024
Chart shows Interest Rate Valuation Model as # of standard deviations above/below historic average.
Summary: Low interest rates should generally drive higher equity prices. This model examines the relative S&P500 position given the relative level of interest rates.
S&P500 Mean Reversion Model: Strongly Overvalued
Updated September 30, 2024
Chart shows S&P500 as # of standard deviations above/below its historic trendline value.
Summary: An extremely straightforward model stipulating that at some point, eventually, the S&P500 will tend to return towards its historic trend line.
Earnings Yield Gap: Fairly Valued
Updated September 30, 2024
Chart shows spread between S&P500 earnings yield and 10Y Treasury, with standard deviation bands above/below its historic average spread.
Summary: A model comparing the earnings yield of stocks vs bonds to show relative value of one against the other.
Recession Indicator Models
The Yield Curve Model: Very High Recession Risk
Updated September 30, 2024
Chart shows spread between 10-year and 3-mo Treasury debt relative to # of standard deviations from historical norm. Yield curve inversions highlighted red.
Summary: When short term (3-month) Treasury yields are higher than long term (10-year) yields, it is a bearish signal that is almost always followed by economic recession.
The Sahm Rule Model: High Recession Risk
Updated September 30, 2024
Chart shows Sahm Rule value - an illustration of recent changes in unemployment indicative of whether or not the economy is currently in a recession.
Summary: The Sahm Rule is the measure of the current 3-month moving average of unemployment compared to the prior 12-month low of that same stat. It measures how quickly unemployment is rising/falling, and is an accurate and timely indicator of when the US economy is in a recession.
The State Coincidence Index Model: High Recession Risk
Updated August 31, 2024
Chart shows # of US states with shrinking coincidence indicator scores. National recessions are shaded.
Summary: A State Coincidence Index (SCI) is an aggregate measure of individual state economic health. This model charts the number of states with month-over-month declines in their SCI. On average, if more than 25 states are in decline, the US overall is entering a recession.
Market Sentiment Models
The Margin Debt Model: Neutral
Updated August 31, 2024
Chart shows margin debt levels as % of total market value, expressed as amount of standard deviations from historical norm.
Summary: Margin debt is money investors borrow to invest in stocks. High margin debt indicates bullish investors, and tends to lead stock market corrections, particularly after margin rates begin falling from their peak. This model looks at changes in margin as a percent of total stock market value.
Junk Bond Spread Model: Neutral
Updated September 30, 2024
Chart shows historical spread between junk bonds and Treasury bonds. Note the inverted y-axis in order to align with theme of "high" values corresponding to aggressive market position.
Summary: High junk bond spreads indicate pessimistic sentiment as investors require very high compensation for taking on additional credit risk. Low junk bond spreads indicate optimistic investors are eager to take on risk, even for relatively low return, compared to safer investments.
VIX Fear Index Model: Neutral
Updated September 30, 2024
Chart shows the CBOE VIX Index value since inception.
Summary: The VIX Index is derived from SPX options prices and represents the amount of volatility investors expect over the coming 30 days. The index has no valence and does not formally predict bear or bull markets. However, in practice, high VIX values represent market fear of upcoming volatility, which tends to correlate with market crashes. Alternately, low VIX values indicating market stability correlate well with bullish sentiments.
