An overvalued market?

Some economists/market strategists like Brian Wesbury believe that due to ultra-low interest rates, the US stock market is still undervalued. Others point to one year trailing price to earnings ratios (P/E) and forward P/E’s being closer to market tops, but far from the massive overvalued conditions in 1999-2000 as indicative of fairly valued markets.

Still others, probably most persistently John Hussman, point to a variety of measures such as the Shiller CAPE, market value/GDP, Tobin’s Q, and other indicators that show a market that is not just overvalued, but poised to potentially give negative returns for all time frames under seven years.

Who should an investor believe? One recommendation might be to see which measures are highly predictive of future market returns. Certainly it might be different this time; maybe the Federal Reserve, increased productivity, and other factors have changed things. But I wouldn’t bet on it. In that case investors might want to know that the measures that are predicting poor returns have the greater accuracy. Although, past performance is no guarantee of future results. It is time to be careful.

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