According to two measures of value, the answer is yes—and dangerously so. According to the CAPE ratio, the stock market is 185% overvalued. Another measure, the q ratio, has it at 80%. It has been overpriced only twice: in September 1929, right before the Great Depression, and in March 2000, at the tail-end of the dot-com bubble.
My prediction is that it will be more difficult for both U.S. stocks and bonds to go up in the coming years. Either the economy will recover and push interest rates higher and bond prices lower or we will experience a double-dip recession with falling stock prices.
Many retirees who are frustrated by low rates have put money that was earmarked for bonds into stocks, hoping the dividends plus the growth will provide sufficient income.
Surprisingly, even after all this, the stock market is expensive; we usually do not begin an economic recovery with stock prices close to all-time highs. But this is not a typical recession. Conversely, bonds are a less appealing investment with interest rates dropping.
We came into this crisis with a trillion-dollar deficit and very low interest rates, challenging our ability to fight this recession with standard measures, such as government spending and central bank interest rate cuts.
According to a 2014 study by Vanguard, the average investor’s portfolio contains 27% foreign stocks.[i] If the foreign stock percentage seems high, remember that the U.S. holds only half of the world’s total stock market value. This means that 50% of the world’s stock market value resides outside of the U.S.
Over the last ten years, however, $1 trillion of investors’ money has moved from active management to index investing. A big reason for this is that, during that same period, most active managers underperformed lower cost-index options.
This presentation is a hypothetical view of financial planning items a client might see in the course of an advisory review. This is for informational purposes only and should not be construed as an investment recommendation or solicitation. Please consult a financial professional to discuss your individual situation prior to making any investment decision. Cambridge does not offer tax or legal advice.
