Are Market Valuations too High?

Are Market Valuations too High?

May 20, 2013 Uncategorized, Tactical Asset Allocation Research
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(Last Updated On: January 1, 2017)

There is a lot of chatter regarding market valuations. Many commentators are very confident that market is overpriced. Overconfidence can be dangerous.

In the words of Twain:

It’s not what you don’t know that kills you, it’s what you know for sure that ain’t true.

Based on the evidence, it is unclear to me that the market is terribly overvalued or undervalued.

First, a look at price to average 5-year earnings. Nothing pops out as crazy.

1
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Next, a look at price to sales. Again, nothing extreme.

2
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Finally, everyone’s favorite–the Shiller PE. On this metric, things look pricey.

3
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

The risk premium as measured by “Shiller yield” minus bonds still looks attractive.

4
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Because the market has been on a tear, everything has been tilted to the right since April 30. Nonetheless, the data are not all screaming that the market looks like he Nasdaq during the Internet craze.

What do you think?

 

 

 


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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.