Is the Market OverValued?
With the long run of the bull market that we’ve had over the last few years the marketing has been soaring yet many are beginning to wonder if it’s overvalued?
Well there are certainly several Journalists in the media that claim it is overvalued. They tend to be looking at a couple of metrics. The first one in the PE ratio, the median PE ratio is about 20 today. On average it’s been about 17, historically if it ever goes above 17 then the returns following tend to be below average, and so they conclude that it’s overvalued. A number of economists use what’s called the CAPE or the Cumulative Average PE Ratio. It’s 17-18 somewhere in that range, today I think it’s mid 20’s somewhere. Certainly by those two measures I think we have an overvalued stock market. On the other hand, interest rates today are real really low. So if you look what PE ratios should e given the low interest rates it’d be pretty high. For example, the price of a bind, say it’s a $1000, divided by the interest that that bond pays, and if it’s a very small number, that ratio can be very large. So a number of people think that we are fully priced, but not over priced given the level of interest rates.
About Hal Heaton:
Hal Heaton is a Professor of Finance at the BYU Marriott Graduate School of Business where he teaches advanced courses in finance and capital markets. Before joining the faulting at BYU, Hal worked at Boston Consulting where he dealt with strategic planning issues for large firms. He has also served on the Finance faulty at the Harvard School of Business. He holds an MBA from Brigham Young University and both a MA in Economics and Ph.D in Finance from Stanford University.