Here is the latest 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 created from Standard & Poor's latest earnings spreadsheet.
For the past few years, we've been following a couple of transportation metrics: Vehicle Miles Traveled and Gasoline Volume Sales. For both series, we focus on the population adjusted data. Let's now do something similar with the Light Vehicle Sales report from the Bureau of Economic Analysis. This data series stretches back to January 1976. Since that first data point, the Civilian Noninstitutional Population Age 16 and Over (i.e., driving age not in the military or an inmate) has risen about 64%.
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.
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.
Here is a summary of the four market valuation indicators we update on a monthly basis.
Personal Income (excluding Transfer Receipts) in March rose 0.21% and is up 4.7% year-over-year. However, when we adjust for inflation using the BEA's PCE Price Index, Real Personal Income (excluding Transfer Receipts) increased to 0.44%. The real number is up 2.8% year-over-year.
The April US Manufacturing Purchasing Managers' Index conducted by Markit came in at 52.8, down from the 53.3 March figure. Today's headline number was at the Investing.com consensus. Markit's Manufacturing PMI is a diffusion index: A reading above 50 indicates expansion in the sector; below 50 indicates contraction.
The BEA's Personal Consumption Expenditures Chain-type Price Index for March, released today, shows that core inflation remains below the Federal Reserve's 2% long-term target at 1.56%. The most recent Core Consumer Price Index release, also data through March, is higher at 2.00%. The Fed is on record as using Core PCE data as its primary inflation gauge. Headline inflation for both series is conspicuously lower, largely a result of low energy costs.
Quick take: Based on the April S&P 500 average of daily closes, the Crestmont P/E is 107% above its arithmetic mean and at the 99th percentile of this fourteen-plus-decade monthly metric.
Was the March 2009 low the end of a secular bear market and the beginning of a secular bull? At this point, approaching eight years later, the S&P 500 has set a series of inflation-adjusted record highs based on monthly averages of daily closes. Let's examine the past to broaden our understanding of the range of historical trends in market performance. An obvious feature of this inflation-adjusted series is the pattern of long-term alternations between up-and down-trends.