Courtesy of Mish.
Overvalued No Matter How You Look
Currently, stocks are extremely overvalued by multiple methods.
- The first way is by looking at Cyclically Adjusted P/E Ratios commonly known as CAPE, Shiller P/E, or P/E 10 ratio.
- The second is by looking at median P/E and P/S (Price to Sales) measures
We will look at both, but here’s a description of CAPE.
CAPE is a valuation measure applied to stock market indexes. It’s defined as price divided by the average of ten years of earnings (Moving average), adjusted for inflation. The essential idea is earnings are mean-reverting making forward looking earnings frequently too optimistic, and current PEs too high following steep corrections.
CAPE is not without its detractors and debates have raged over its usefulness recently, just as they do at every major market peak when investors find all sorts of silly reasons to presume “It’s different this time”.
Stocks More Overvalued Now Than Ever
I will post a CAPE chart in a bit, but for now let’s take a look at another PE measure I first saw described today.
The idea is from Ned Davis, but written up by Mark Hulbert in Opinion: Stocks are more overvalued now than at 2000 and 2007 peaks.
Median NYSE Stock’s Current P/E and P/S Ratios Sparks Concern
The stock market currently is even more overvalued than it was at the bull market peaks of both March 2000 and October 2007 — according to not just one, but two, valuation measures.
…
