Hulbert: Small Cap Sector Shockingly Overvalued

In a recent MarketWatch article, Mark Hulbert reveals a revised calculation that the small-cap sector is currently valued at a whopping 78.7 times earnings. He writes, “the Russell 2000’s true P/E today is higher than it was at either the top of the internet bubble or the 2007 bull market peak.” Hulbert describes the calculation, which he credits to financial services firm INTL FCStone’s Vincent Deluard, who told him that nearly a third of the companies in the Russell 2000 index are losing money. This omission, writes Hulbert, “has huge consequences.” Neither the FTSE Russell (the company that created the […]

David Tepper Says the Market is Not Overheated

The head of Appaloosa Management is “rejecting arguments that stocks are overvalued and believes there are still plenty of opportunities,” according to a recent CNBC article. Tepper says “any comparisons to past overheated markets are ridiculous,” adding that while stocks do look expensive, higher multiples are supported by the global economy in which he believes growth will continue and earnings will improve. Tepper argues further that stocks are still inexpensive relative to interest rates, and any rate hikes from the Fed will be slow in coming. The article cites Tepper’s 2010 prediction that “either the market would rally on strong […]

Shiller Says Market Valuations Warrant Caution

Nobel Laureate Robert Shiller writes in a recent New York Times article that “today’s CAPE is sending a troubling message,” noting that the market valuation ratio he developed (which now stands at nearly 30) was higher only in 1929 and around 2000 (when it hit 33 and 44, respectively). In both instances, Shiller writes, “market declines followed those very high readings.” He qualifies his comments, however, by clarifying that the CAPE “suggests a dim outlook for the American stock market over the next 10 years or so, but it does not tell us for sure nor does it say when […]

Buffett Puts Market’s Valuation in Context with Earnings Yield vs. 10 Year

In a CNBC interview that aired last month, Warren Buffett shared his thoughts on current market valuations and how he would respond to investors that feel they missed their opportunity to buy into the market. “Well, I would say they don’t know, and I don’t know. And if there’s a game it’s very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it– is a terrible mistake.” Buffett believes the U.S. stock market is a good game to be in. In fact, the dominant […]

The Market Valuation Snapshot

In our Hotlist newsletter from last month we took a look at the market’s stretched valuations based on several indicators, and offered insight regarding how actions by the current administration may or may not substantiate them. The market P/E from the beginning of the year, based on trailing 12-month earnings (as of January 9th ,) was 25. We tracked other metrics as follows: Shiller P/E: 28.2, up from 25.7 as of the last update in May. This measure, which uses inflation-adjusted 10-year historical earnings to account for short-term fluctuations in profit margins during business cycles, tracked well above the historical […]

European Fund Manager Says Bonds May Rebound

The largest money manager in Europe believes that investors who have driven U.S. stock markets to record highs in anticipation of fiscal stimulus from the Trump administration “may be in for a surprise,” says a recent Bloomberg article. Didier Borowski, head of macroeconomics for Paris-based Amundi SA, argues that even if Trump delivers on his fiscal stimulus promises, results won’t surface before next year. “Following the vote for Trump,” he says, “markets have reacted as if there were only upside risks. U.S. equity markets could go further into bubble territory as risks are becoming increasingly asymmetric. That would be an […]

Market’s Valuation Could Hold Back Trump Bull

During the Trump years, it will be tougher for stocks to see the kind of gains that occurred during the Obama administration,” according to last week’s Wall Street Journal. This is not only because the market had bottomed when Obama took office (and stocks were cheap), but also because of “what happened to corporate profits versus the overall economy.” At the end of last year, that article states, the total value of U.S. stocks was an estimated 169% of gross domestic product (GDP), compared to 85% at the end of 2008, and is “now approaching the 177% valuation the market […]

More Upside in International Stocks

The continued grind of the bull market may not be justified, according to an article in this week’s Investment News. In fact, the article, written by Joe Smith, senior market strategist at CLS Investments, argues the positive data points currently baked into the market—a dip in unemployment, improved corporate sales and earnings, additional consumer spending—don’t necessarily indicate a “positive view for investors in the U.S.” Domestic stocks, it asserts, look expensive compared to those overseas, and management initiatives to cut costs and increase share buybacks (rather than focusing on operating growth and/or reinvestment) have driven improvements in corporate earnings. “With cheap […]

U.S. Stocks Show Increased Global Footprint

The post-election market rally coupled with the strength of the U.S. dollar has increased the share of U.S. stocks as a percentage of the global economy, according to this week’s Wall Street Journal. FactSet data reflect the market capitalization of U.S. stocks at approximately $25 trillion last Friday, a figure that represents 40% of the value of global equities, the article says—the highest level since 2006. “Investors and traders have largely interpreted the president-elect’s policy priorities as likely to benefit U.S. businesses,” the article states, “particularly his plans to cut corporate taxes and increase fiscal stimulus. Also, bets on higher […]

A Buffett Market Valuation Indicator

There is a mixed bag of outlooks concerning the current bull market and its staying power. In an article posted yesterday on CNBC.com, Validea CEO John Reese describes one metric used by Warren Buffett to gauge conditions on the ground and signal where things might be headed. The Buffett mantra of focusing on business fundamentals rather than hearsay transcends to today’s prickly political landscape. Reese writes that the Berkshire Hathaway CEO believes the “performance of companies over time is what drives those stock returns, not necessarily who wins the race for the presidency.” That said, he does believe in paying attention […]

Is Shiller’s CAPE as Scary as it Seems?

In the 1990’s, economists Robert Shiller and John Campbell created a valuation metric called the “cyclically adjusted price-earnings” ratio, or CAPE. A Wall Street Journal article from earlier this month examines whether this metric might be sending a false signal that the market is overheated. The CAPE ratio values shares based on 10 years rather than one year of earnings which, the article explains, “smooths out periods like just prior to the housing bust, when unusually strong earnings made stocks look reasonably priced, and post-recession recoveries, when weak earnings make stocks look expensive.” The CAPE is now at 27, about […]

Hulbert Highlights Indicators of an Overvalued Market

There are six strong reasons why today’s bull market is on “weak legs” according to Mark Hulbert in a MarketWatch article from earlier this month. He offers the following chart to illustrate that the current stock market is “more overvalued than it was at 79% to 95% of bull market peaks dating back to 1900”: Hulbert comments on current indicators including the following: Price-book ratio of 2.8 is higher than it was during 23 out of 29 of the major market peaks since 1920; Price-sales ratio of 1.9 is higher than it was during 18 of the 19 peaks since […]

Are Stocks Cheap or Expensive?

Yale’s Robert Shiller and Penn finance professor Jeremy Siegel have long dueled over whether stocks are cheap or expensive, and Daniel Fisher, of Forbes, reviews the arguments in his recent post. Shiller devised CAPE by measuring the inflation-adjusted earnings per share for the S&P over the trailing 10 years, instead of just the most recent quarter or year, and compared that number to long-run averages since 1871. The results showed a strong tendency for CAPE to revert to the mean — meaning when it was high, stocks tended to underperform going forward, and when it was below the long-term mean, […]

Big Opportunity In Small Stocks?

It’s no secret that the market doesn’t look too cheap right now. In fact, by many measures, it’s overpriced. But the difference in the valuation of small stocks and large stocks right now is striking, Validea CEO John P. Reese writes in his latest column for Forbes.com. “Since the end of 2005, my company has been tracking the valuation characteristics of the several thousand stocks in our database, a pretty good approximation of the U.S. market,” Reese explains. “Since then, they have traded at an average trailing 12-month P/E ratio of 19.1. Currently, the average is 21.3, representing an 11.2% […]

Comparing CAPE 10 with CAPE 5 or 6 — Market May Not be as Expensive as it Looks

Writing on ETF.com, Larry Swedroe of the BAM Alliance explains that the market looks less overvalued if one uses a period shorter than the commonly used 10-year period in applying the methodology of the Shiller cyclically adjusted P/E ratio (the CAPE 10). The reason for doing this is that “with the Great Recession causing the S&P 500 earnings to not recover to their 2007 level until 2010,” a 10-year period may include distortions created by the financial crisis. Further “there is nothing magical about using 10 years to calculate average earnings.” Indeed, in Benjamin Graham and David Dodd’s 1934 book […]