Building A Dividend Growth Portfolio from Scratch in Today’s Expensive Market


The stock market as measured by the S&P 500 is at an all-time high. However, that is not what concerns me. What I am worried about is the extremely high relative valuation of the market. To be clear, the market can be trading at an all-time high and still be attractively valued. Moreover, the long-term direction of the stock market has been up. On the other hand, that ascension is interrupted from time to time due to overvaluation eventually instigating the inevitable reversion to the mean valuation.

The following graphic courtesy of Current Market Valuation is an awesome job of illustrating and validating the above paragraph. On the graph you can see the long-term steady increase in the market as described. However, what I really like about the following graph is how they color-coded valuation. When the price line is gray valuation is reasonable, when the price line is green it connotes periods of undervaluation, yellow denotes overvaluation and red reveals extreme or what I call dangerous overvaluation. The reader should note that the S&P 500 has currently entered that dangerous territory.

(Graph courtesy of Current Market Valuation)

S&P 500 Price Correlated With Fundamentals Since 2001

With the following graphic I will utilize the calculator functionality of FAST Graphs to provide a perspective of the S&P 500’s overvaluation based on a conservative calculation of the index reverting to the normal (mean) valuation since calendar year 2001. The moral of this story is that current valuation would suggest that this would be a very poor time to be investing in a S&P 500 index fund. The major issue here is not necessarily the potential loss of capital. Rather, the real issue is the loss of time.