Economic Indicators Signal Overvalued Stock Markets

07/18/2011 Share 0 comments

Markets have gone through risk on and off modes several times this year. Considering the state of global and domestic economy, this is not surprising. The tug of war between solid U.S. corporation balance sheets (other than financial companies) and the weak recovery ladened with bad news (such as the recent European debts) continued.

As of 7/15/2011, we have the following readings the market valuation:

• Buffet Stock Market Indicator: The ratio of the total stock market capitalization to GNP is 93%. US stock market is Modestly Overvalued. See the Historical Chart and related description. 
• Shiller CAPE10: The ratio of Real Price to the average of last 10 year Real Earnings(CAPE10)(23.92) to its long term average (16.41) is 1.46. US stock market is 46% Overvalued. See the Historical Chart and related description.
• Hussman Peak PE: The ratio of Real Price to the average of last 10 year Peak Real Earnings(14.16) to its long term average (11.94) is 1.19. US stock market is 19% Overvalued. See the Historical Chart and related description.

Another important metric credit spread (TED Spread) that measures on BAA-rated and AAA-rated corporate bonds has been above 20 basis points or so for over 3 months now. This is still a quite low reading in a longer period but judging in the last 9 months, it is elevated. When credit spread is high, it signals investors' concern on risk. See the Historical Chart.

Based on the latest weekly commentary by John Hussman, current stock valuations imply expected 10-year S&P 500 total returns of about 3.8% annually.

To summarize, markets are over valued. The tug of war is leaning more toward downside than upside. For retirement investing portfolios, it is a good time to balance back to target allocations that you are comfortable with and adopt a systematic approach.

Symbols: SPY, DJI, AGG, SPX, DJI, COMP, Economic Indicators

Exchange Tickers: (AGG), (SPY)