The Great Stock Overvaluing

In the past, I have shown that we were at the highs for key valuation indicators even though we were not for the current favorite: the Shiller CAPE P/E Ratio. That was 44 at the top in early 2000 and has been as high as 33 in 2018. CAPE means “cyclically adjusted for 10-year average earnings,” which is better, as earnings can be so volatile, especially around tops and downturns.

But I have in the past adjusted that further for the 10-year average GDP growth rates, as this bull market and recovery are far inferior to past ones, especially that 1991-through-2000 boom that saw 4% growth rates instead of 2%. Stock valuations are and should be higher when growth is higher. That adjustment showed that the market is currently substantially more overvalued than in 2000.

My other two favorite indicators are so because they can’t be manipulated as much by earnings and earnings per share. The first is often called the “Buffett Indicator”. It simply measures the total market capitalization of stocks vs. GDP.

The Wilshire 5000 is used as the broadest measure. In this case, reducing the number of shares outstanding does not directly affect total market value. But when stock buybacks do accelerate price/earnings ratios from higher EPS growth, then that does tend to raise the overall market capitalization to some degree. But this is still a better indicator than P/E ratios.

(Click on image to enlarge)

This indicator now at 151% and rising fast is clearly higher than the last all-time high at 141% in 2000, at the top of the last tech bubble peak. Hence, this tech-driven bubble has not gotten bubblier. And this indicator looks to go a good bit higher if my minimum targets for the Nasdaq of 10,000 are hit in the next few months.

This could hit 160%+ easy. And note how low this indicator got after the last tech crash – down to 56%. The real target on longer-term cycles would be down more to the 33% low in the early 1980s… One bad-ass crash coming, in that case.

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