Our monthly market valuation updates have long had the same conclusion: US stock indexes are significantly overvalued, which suggests cautious expectations on investment returns. In a "normal" market environment -- one with conventional business cycles, Federal Reserve policy, interest rates and inflation -- current valuation levels would be a serious concern. But these are different times.
Here is a summary of the four market valuation indicators we update on a monthly basis.
This update is in response to a standing request for real (inflation-adjusted) charts of the S&P 500, Dow 30, and Nasdaq Composite. Here are two overlays — one with the nominal price, excluding dividends, and the other with the price adjusted for inflation based on the Consumer Price Index for Urban Consumers (which is usually just referred to as the CPI).
Quick take: At the end of December the inflation-adjusted S&P 500 index price was 94% above its long-term trend, up from 87% the previous month.About the only certainty in the stock market is that, over the long haul, over performance turns into under performance and vice versa. Is there a pattern to this movement? Let's apply some simple regression analysis to the question.
Here is a new update of a popular market valuation method using the most recent Standard & Poor's "as reported" earnings and earnings estimates and the index monthly average of daily closes for the past month. For the earnings, see the table below created from Standard & Poor's latest earnings spreadsheet.
The final December US Manufacturing Purchasing Managers' Index conducted by Markit came in at 54.3, up from the 53.1 November final. Today's headline number was slightly above the Investing.com consensus of 54.2. Markit's Manufacturing PMI is a diffusion index: A reading above 50 indicates expansion in the sector; below 50 indicates contraction.
The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. It's a fairly simple concept, but laborious to calculate. The Q Ratio is the total price of the market divided by the replacement cost of all its companies.
Quick take: Based on the December S&P 500 average of daily closes, the Crestmont P/E is 99% above its arithmetic mean and at the 98th percentile of this fourteen-plus-decade monthly metric. The December valuation is the highest since May of 2001 during the Tech Bubble.
Today the Institute for Supply Management published its monthly Manufacturing Report for December. The latest headline Purchasing Managers Index (PMI) was 54.7 percent, an increase of 1.5 percent from 53.2 previous month. Today's headline number was above the Investing.com forecast of 53.6 percent.
Valid until the market close on January 31, 2016
The S&P 500 closed December with a monthly gain of 1.82% after a gain of 3.42% in November. All three S&P 500 MAs are signaling "invested" and three of the five Ivy Portfolio ETF MAs — Vanguard Total Stock Market ETF (VTI), PowerShares DB (DBC), and Vanguard FTSE All-World ex-US ETF (VEU) — are signaling "invested". In the table, monthly closes that are within 2% of a signal are highlighted in yellow.