Nine long-term valuation indicators with strong historical track records point to a stock market that is extremely overvalued, according to MarketWatch columnist Mark Hulbert. Seven of the nine project the S&P 500 will significantly lag inflation over the next decade, and the average projected real return across all nine tools is negative 3.2% annualized.
Seven of nine indicators point the same way
Almost all valuation indicators with a solid forecasting record now signal that the stock market is not just overvalued — it's extremely overvalued, Hulbert wrote. The nine indicators he tracks were each chosen for their statistically significant record forecasting the S&P 500's subsequent 10-year real total return.
Seven of the nine indicators project the S&P 500 will significantly lag inflation over the next decade, while an eighth points to a flat real return. Only one of the nine projects a real return above inflation, and even that stays well below historical norms. Averaged together, the nine tools imply a total real return of negative 3.2% annualized over the next decade.
A household indicator near an all-time high
Of the nine, the one with the best statistical track record measures the average U.S. household's equity allocation. The theory holds that households pile into stocks late in a rally, making them most bullish near market tops and most bearish near bottoms. That household equity-allocation gauge now sits close to an all-time high, Hulbert noted.
The indicator's logic has nothing to do with ratios of price to earnings, sales, book value, dividends or GDP, yet it points the same way as the other eight measures. It was first identified by the anonymous author of the Philosophical Economics blog. According to that blog: "single greatest predictor of future stock-market returns."
Years of warnings, no clear signal yet
This household indicator has sat in overvalued territory for several years, and yet the market on balance has kept climbing. But Hulbert cautioned that this doesn't necessarily mean the rally will continue: if the historical indicators have stopped working, investors are in uncharted territory with no clue which way the market heads next.
The warnings arrive as Wall Street weighs the federal debt, an intractable war in the Middle East and a possible AI bubble. If the odds of success in stocks are now no better than a coin flip, Hulbert asked, is that investing or gambling?
Source: MarketWatch (Mark Hulbert)
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