Are Stock Prices Too High?

In this video, I’ll explore whether stock prices are too high, and therefore likely to crash.

Bearish pundits frequently say the stock market is overvalued. What does this mean?

Usually that prices are higher than they have been in the past when compared with another measurement, such as earnings or sales or even as a percentage of GDP.

[CNBC story and chart shown at 0:48.]

[John Hussman excerpt shown at 1:55.]

What’s the purpose of such observations? To indicate whether a crash is imminent. If it is, we should sell.

Are valuation measurements reliable indicators of this? No. They’re sometimes right, sometimes not, just like everything else in the coin-toss environment of stocks.

Look at the CNBC chart of market cap to GDP.

[CNBC chart shown at 3:34.]

The straight line shows the long-term average of the measure, where it’s almost never at.

Compare it with SPY since 1996:

[SPY chart shown at 4:09.]


1. No overvaluation into the dot-com crash.
2. Rising as stocks fell after the crash.
3. Crashing with stocks in 2008.
4. Rising with stocks since 2009.

So what? There’s no usable pattern in there.

How about Hussman’s ominous-sounding warning? He doesn’t share his valuation measurements, calling them just “the most reliable” ones he identifies, but are they reliable? Not recently.

Here’s an excerpt from this year’s Kelly Letter Note 11 sent to subscribers on March 19, 2017:

[Summary of six false alarms about overvaluation from Hussman since July 2014, shown at 5:55.]

Stock market valuation measurements are not reliable. They cannot be used to time entries and exits.

The market can keep rising above where people think it’s expensive, and fall below where they think it’s cheap.

I pay no attention to valuation, and suggest you ignore it as well. Nobody knows whether stock prices are too high or, frankly, what that notion even means.

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Thank you for watching!

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  1. William Campbell
    Posted March 29, 2017 at 5:02 am | Permalink

    Great video. With the evidence there for all to see, when will these characters rein in the absolutes.

    • Posted March 31, 2017 at 12:24 pm | Permalink

      Thank you, WC. They’ll never rein them in because most people continue falling for the official-looking scare tactics. They make for great marketing.

  2. Steve Powell
    Posted March 29, 2017 at 1:35 am | Permalink

    I love your market observations. You always provide simple, but profound, insights into market. As you say, price is all that matters. It has taken me many years to learn this. Hopefully your younger subscribers will implement this key market concept and not waste their time listening to market pundits. As always, looking forward to receiving the next Kelly Letter on Sunday morning.

    • Posted March 31, 2017 at 12:25 pm | Permalink

      Thank you, Steve. Take heart: Many young investors are catching on. We’ll never reach a majority, but we’re reaching a growing number.

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