Is the stock market overvalued and ready to crash?
I have fielded a lot of questions lately on just that topic. Typically, investors get uneasy when the stock market declines in value. However, with visions of 2008 still in our heads, many investors are increasingly nervous as stocks continue to make new highs.
There are compelling arguments to be made that the stock market is overvalued. Robert Shiller, a finance professor at Yale University and recent Nobel Prize recipient, believes stocks are wildly overvalued. As evidence, he cites the “cyclically adjusted price/earnings ratio,” which he developed. This shows the value of stocks today versus their historical earnings smoothed over the last decade. This metric indicates that stocks are trading significantly higher than their average level since 1871, when Ulysses S. Grant was president. This is all the more alarming because Shiller correctly called both the Internet and housing crises.
Even scarier, a highly respected research firm recently noted that by one measure, current valuation levels are identical to those of the bull market highs of 2000 and 2007, just before things got really ugly.’
In order to have a free market, both sides of a debate must be represented. If everyone thought the market was going to tank, it would already be there. There is just as much heft on the other side of the argument. Charles Schwab strategist Liz Ann Sonders believes there is more upside for stocks, perhaps a lot more. She notes that stock prices, smoothed over 10 years,
Charles Schwab strategist Liz Ann Sonders believes there is more upside for stocks, perhaps a lot more. She notes that stock prices, smoothed over 10 years, trend in one direction for many years. Given that we are only five years into the current up cycle, there could be a lot more room for stocks to run. ……