**Are Stocks Undervalued Yet?**
**Eight valuation models suggest that even after recent declines, the stock market isn’t a good value**
**By Mark Hulbert, The Wall Street Journal, June 4, 2022**
**The sobering news is that even at its lowest point in mid-May, the S&P 500 index wasn’t even close to being undervalued according to any of eight valuation models that my research shows have the best long-term track records....**
**On balance, these eight indicators at the mid-May low stood at more than twice the average valuation of the bear-market bottoms seen in the past 50 years. And, seen in comparison with all monthly readings of the past 50 years, the average of the eight measurements was in the 88th percentile....**
**Let’s start by looking at the cyclically adjusted price/earnings ratio, or CAPE...On May 19, the CAPE ratio stood at 30.4. That is more than double the average CAPE ratio at all bear-market bottoms since 1900...**
**Average investor equity allocation. This is calculated as the percentage of the average investor’s financial assets — equities, debt and cash — that is allocated to stocks...at the end of last year it was 68% higher than the average of the past 50 years’ bear-market bottoms, and at the 99th percentile of the 50-year distribution...**
**Price-to-book ratio...Buffett Indicator. This is the ratio of the stock market’s total market capitalization to GDP....Price-to-sales ratio. This is the ratio of the S&P 500 to per-share sales...Q ratio. It is the ratio of market value to the replacement cost of assets. ... Dividend yield ... P/E ratio. This is perhaps the most widely followed of valuation indicators, calculated by dividing the S&P 500 by component companies’ trailing 12 months’ earnings per share. ...**
**It is worth emphasizing that these valuation indicators’ impressive track records are based on their abilities to forecast the stock market’s subsequent 10-year return. ...** [end quote]
Every one of the indicators mentioned above is overvalued. The Percentile of each reading at the stock market’s mid-May LOW was well above the AVERAGE relative to distribution of monthly readings over the past 50 years. This shows that the market is overvalued even at its recent low point. It would have to drop much further to revert to the mean.
Hulbert discussed the indicators in more detail here, where he saw the bubble forming in 2018. The Fed saw the same bubble and began to raise the Fed funds rate, but backed down when the market had a hissy fit.
Mark Hulbert didn’t point out that the high Average investor equity allocation is due to TINA (There Is No Alternative to stocks) which was caused by the Federal Reserve’s unprecedented suppression of interest rates to stimulate the economy. Now that the Fed is planning to return to “neutral” rates due to inflation, TINA no longer applies. Many people will be selling stocks to buy safer bonds as soon as the yield from bonds becomes attractive.
It’s important to note that these indicators predict long-term results. So the strategy of holding cash through a short bear market in expectation of longer-term stock market growth is the opposite of what this analysis predicts. Unless the Fed returns to ZIRP, the long term growth prospects of the market are very slight since they start from an extreme high valuation.
Here are charts of Hulbert’s indicators.
S&P 500 PE Ratio
Tobin’s Q is at a current level of 1.764, up from 1.711 last quarter and up from 1.640 one year ago. This is a change of 3.14% from last quarter and 7.59% from one year ago.
Even with the decline since January 2022, today’s market is in a bubble. Stocks are dramatically overvalued on a historical basis. If the Fed goes back to historical actions (avoiding gross meddling in the asset markets) stocks will return to historical valuations.