- Based on its historic trend, the stock market appears to be marginally overvalued.
- The historic trend suggests a probable real gain of about 20% over the next five years.
- Analysts’ long-term forecasts of stock returns made 4 years ago appear to have been unrealistically low.
- The Shiller Cyclically Adjusted Price to Earnings Ratio is relatively high (but not extremely high), and a market correction is possible.
Blog Archives
Is the Stock Market Overvalued? — Update Dec-2015 — Estimating Returns to 2020 and Beyond
Estimating Market Direction and Long-Term Returns with a 35-Year Moving Average of Robert Shiller’s P/E10
- The long-term mean of the Shiller Cyclically Adjusted Price to Earnings Ratio P/E10 incorporates time-inconsistent data, causing substantial underprediction of realized stock returns in recent decades.
- Better prediction of market direction and returns can be achieved by using a 35-year moving-average of P/E10, instead of its long-term mean.
- Stocks seem only overvalued after P/E10 becomes greater than its 35-year moving average plus 7.5 added to it, with major market declines starting one to five years thereafter.
- An analysis shows that whenever P/E10 rose from below to above its 35-year moving average significant ten-year gains for stocks followed.
- Both the historic market trend, and the current level of the Shiller CAPE P/E10, suggest probable real market gains of about 20% to 28% to the end of 2020.
The Forward Rate Ratio: Predictor Of An Ongoing Stock Bull- And Bond Bear-Market
- Prior to recession the yield curve becomes inverted, as indicated by the Forward Rate Ratio between the 2-year and 10-year U.S. Treasury yields (FRR2-10) being less than 1.00.
- The FRR2-10 has recently peaked at about 1.20 signifying that US economic activity is in the expansion phase of the business cycle, far away from the next recession, with ongoing gains for the stock market predicted.
- Typically after peaks of FRR2-10 the yield of 10-year Treasuries rises, signaling a bond bear-market.
- When FRR2-10 falls to near 1.00 the transition from expansion to boom occurs. The average lead time after FRR2-10 becomes less than 1.00 to the subsequent recession start was 14 months for the last seven recession.
Is the Stock Market Overvalued? Estimating Returns to 2020 and Beyond
- Based on its historic trend, the stock market appears to be marginally overvalued.
- The historic trend suggests a probable real gain of about 20% over the next five years.
- Analysts’ long-term forecasts of stock returns made 3 years ago appear to have been unrealistically low.
- The Shiller Cyclically Adjusted Price to Earnings Ratio is relatively high (but not extremely high), and a market correction is possible.
Estimating Stock Market Returns to 2020 and Beyond: Update July 2014
July 7, 2014 About two years ago evidence was presented that a major bull market may have commenced in 2009. Additionally, a statistical analysis of the historic data of the S&P Composite presented in an Aug-2012 article and Jan-2014 update thereto supported this finding. Since August 2012 the S&P500 has now gained a real 40% to the end of June 2014. So what further gains can we expect, if any?
Estimating Stock Market Returns to 2020 and Beyond: Update January 2014
A major bull market may have commenced in 2009 for which evidence was presented in various 2012 commentaries. Since August 2012 the S&P 500 has gained a real 30% to the end of 2013. So what further gains can we expect?
The Ultimate Death Cross – One Year Later
In July 2012 Albert Edwards, the closely followed investment strategist at Société Générale, warned that the S&P 500 was “on the verge of an ultimate death cross,” foretelling imminent major losses for the stock market, with the S&P 500 possibly seeing its index halved to 666 points. The ultimate death cross occurs when the 50-month moving average of the S&P moves below the 200-month moving average, or put another way, when the difference between these moving averages – the spread – becomes less than zero.
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