Is the stock market overvalued? It’s a question that I’ve been wrestling with for some time now, and regular readers of this blog know where I stand on the issue. I am deeply suspicious of the high market indices we’ve been seeing over the past year or two, and I worry that we are vulnerable to a significant correction. Some of the numbers I’m seeing lately, however, don’t just have my attention, they have some of the top market analysts and economic experts sitting up and taking notice.
Consider this: all six of the major earnings indicators suggest that we are experiencing a stock market that is “over its skis”. Leading metrics like the P/E Ratio, the Schiller Ratio, the Dividend Yield and more are all approaching—or are already in—the danger zone. Any one of those ratios would be worth paying attention to, but when all six of them are lining up this way, that’s a huge red flag. Or at least a pretty prominent Proceed With Caution sign.
What does market history have to say about this? Well, in the 35 bull market peaks we have experienced since 1900, the average subsequent Dow loss is about 30%. If you want a sense of what these big economic indicators might mean for the average investor, just think about what a 30% market loss might mean for your portfolio. For any investor who has a majority of their assets in the market, but particularly for those approaching retirement, this may be the ideal time to reduce your exposure and move some assets into safer and less volatile investment vehicles.