Enclosed is an update of the Stock Market Overvaluation graph (43%-90% overvalued). The first graph below includes Robert Shiller’s Cyclical P/E 10 valuation measurement which tracks back to 1871. Robert Shiller of Yale won a Nobel Prize in 2013 for his work on asset valuation. We have also included the Buffett Indicator of stock market value. We will also be disseminating articles that may be of interest. Honestly, you are better off not reading this stuff! We are following a proven methodology that endowment funds use. We also collaborate with the top advisors in the country (we have expanded this collaboration over the years). This methodology has done a great job over this tumultuous past decade and a half and the decades prior.
The average overvaluation is almost 70% on the enclosed Stock Market Overvaluation graph. That doesn’t mean that the stock market will fall that much. However, the stock market will adjust; it is baked in the cake. No one knows when this will happen. The chart on the right provides what the gain would need to be to recover from a 50% or more stock market loss. It would require a gain
of 100% or more! The key in this market is to attempt to make money but not lose your shirt. The methodology we use does that. The goal is to protect principal but also share in the gains when an asset class (US stocks, foreign stocks, real estate, commodities, bonds, cash and others) is performing well. Your portfolio growth will be far greater if you avoid large losses so you have more money to grow when the market provides sustainable gains. This is the case even if you experience small or no gains before the market slide. I have often highlighted in quarterly reports, speeches and presentations how a portfolio that experiences large gains and large losses fares much worse than a portfolio that experiences no or nominal gains, avoids larger losses, and then shares in strong upside rallies.*
An easy way to ascertain stock values is dividend yields. The average historic dividend yield for stocks is 4+% but now is approximately 2%, which tells you that stocks are greater than 50% overvalued. Low interest rates don’t justify the nosebleed prices. Crestmont Research accounts for this in their P/E (Price/Earnings) stock market valuation calculation which measures the current stock market overvaluation at 90%. Lastly the Buffett Indicator of stock market value, which measures the value of the stock market using corporate earnings and Gross Domestic Product (GDP), remains at the highest level it has been in history, other than the year 2000 peak. It is currently much higher than in 2007, before the market lost over 50% the last time.
We will continue to watch things closely for risks AND opportunities and keep you posted. Thank you for your continued confidence.
I hope all is well with you and your family.
“If everyone is thinking alike, then no one is thinking.” – Benjamin Franklin
*Past Performance is not indicative of future results.
The Buffett Value Indicator July 2016
The mean is 69.7% – currently 71% overvalued.
*Past Performance is not indicative of future results.