Is the Stock Market Overvalued?

When meeting with investors recently, we often hear “with the stock market at, or near, all-time highs, is this a good time to own stocks, or should I cash in and wait for a market correction?”

It is hard to argue that stocks are not at least somewhat overvalued. A good way to measure stock market valuations is the Shiller PE ratio, made popular by Yale Professor and Nobel Prize winning economist Robert Shiller, which does so by dividing the price by the 10 year moving average, adjusted for inflation. Since 1881 the Schiller P/E has averaged 16.76 for the S&P 500, while currently the Shiller P/E sits at 29.76 as of June 7, 2017.

However, even though US stocks are showing signs of being overvalued, this does not mean they cannot stay overvalued for lengthy periods of time. Goldman Sachs Asset Management’s June 2017 “Market Pulse” publication shows that the, on average, US equity valuations remain elevated above the 80th historical percentile for 60 months while our current run of elevated valuations is 49 months.

We are cautious of US equities, but we must maintain diversification among various asset classes because nobody knows exactly what the future holds. Although US equities seem expensive, there are several other parts of the world that can still offer attractive valuations as measured by their Shiller P/E ratios as of 4/30 2017. Data from https://www.researchaffiliates.com/en_us/asset-allocation/equities.html.

Seemingly more attractive than the US market are parts of Europe and some Emerging Markets; however, although they have lower P/E’s this does not mean they are without risk. US protectionism, tax law changes, currency risk, geopolitical risk, and interest rates are all factors that must go into such an investment decision. We recommend working with a Wealth Manager to discuss these risk factors as well as risk tolerance to determine if such an investment is right for you.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.