Stocks are more overvalued now than at 2000 and 2007 peaks

MarketWatch ^ | 12/12/2015 | Mark Hulbert

[SeekAndFind]

The stock market currently is even more overvalued than it was at the bull market peaks of both March 2000 and October 2007 -- according to not just one, but two, valuation measures.

That at least is the message of an analysis released earlier this week by Ned Davis Research, the quantitative research firm. What caught my eye in the firm's analysis was that, unlike virtually all others that conclude that stocks are overvalued, this one was not based on the so-called Shiller P/E -- the cyclically-adjusted P/E ratio championed by Nobel laureate Robert Shiller of Yale University.

That's noteworthy, since there would be nothing new in reporting that Shiller's P/E shows stocks to be overvalued. That ratio has been giving this same message for several years now, and skeptics have found many ways of wriggling out from underneath its bearish implications.

But Ned Davis's latest report focuses on something different: the median stock's price/earnings and price/sales ratios. The median stock, of course, is the one for which exactly half have higher ratios and half have lower. By focusing on the median, Davis's findings are immune from the charge that they are being skewed by outliers -- such as the terrible earnings among energy companies.

The chart at the top of this column summarizes what Davis found. Currently, according to his firm's research, the median NYSE-listed stock has a price/earnings ratio of 25.6, when calculated based on trailing 12-month earnings. At the bull market peak in October 2007, for example, the comparable ratio was below 20; at the top of the Internet bubble in March 2000, it was even lower.

[SeekAndFind]

[Roman_War_Criminal]

I’ve been waiting for a crash since 2014. It’ll happen soon I suppose.

[dp0622]

that’s a Hugh and Series number!!!

seriously, 25 is pretty darn high.

[proxy_user]

This is an average. There are many stocks that trade at 9-12 times earnings.

But, naturally, that means there must also be many high-fliers as well. Watch out for those!

[Memphis Moe]

Interest rates are much lower now than in 2000 and 2007 and therefore PEs are higher.

[Jim from C-Town]

I have given up on predicting the market. It seems totally disconnected from the actual economy.

[Leaning Right]

Those charts have value, but are only complete when the bond rates at the time are also included. Stocks are certainly overpriced now (IMHO). But I'm guessing that folks are much less likely to abandon stocks today because the alternative is a bond fund paying 1%.

[samtheman]

Bookmark

[Leaning Right]

I have given up on predicting the market. It seems totally disconnected from the actual economy.

Agreed. As I have noted elsewhere, the Fed has destroyed all alternatives to the stock market. It used to be take your pick (based on your risk appetite): stocks, bonds, or CDs.

But now bonds and CDs pay next to nothing. So the balancing effect of bonds and CDs is gone.

[familyop]

They need to continue cutting private sector jobs to keep oil down and support regulator incomes and pensions.

[sparklite2]

AFAIAC, the market crashed when zero got elected and stayed that way for years. What’s propping it up now are the zero interest rates on money markets and the underwater bond market.

[minnesota_bound]

My Netflix stock has gone up and down from a low of $97 to a high of $130 since Oct 22. From Dec 4 it went from $130 down to $118.

I swear Wall Street is manipulating the stock prices with those algorithms of theirs.

[Roman_War_Criminal]

I think they have been manipulating the stocks for years.
It’s going to be ugly when the cards fall.

[Texas Eagle]

Hence the need for more and more government spending. Wall Street is being propped up by the trillions of dollars Obola, Boner, Ryan and McConnell have been spending.

Be looking for an "emergency" spending bill to dominate the news cycle.