You get on your news feed and see many “professional investors” saying that now is the time to invest in the U.S. stock market. For many of us we know the saying, “buy low and sell high.” But, is the U.S. stock market at It’s absolutely lowest point to buy? Or is it to high and we should sell.
This article will explain 6 core indicators on whether the U.S. stock market is overvalued, undervalued, or fairly valued.
Now, lets look at the 6 core indicators on whether the market is high or low according to currentmarketvaluation.com.
#1. The Yield Curve
The yield curve measures the bond interest rates on 10 year and 3 year treasury bonds. This looks to see if the interest rates are higher on short term bonds (3 year STB) compared to long term bonds (10 year LTB). If the interest rates are higher on a STB than the LTB, it indicates a recession. Currently, this is the case.
Yield Curve: OVERVALUED
#2. The Buffett Indicator
The Buffett Indicator compares the current Gross Domestic Product (GDP) to the stock markets total value.
Historically, the value of this indicator is 128%. Currently, the value is at 157%. This gives the Buffett Indicator less than a 1% standard deviation.
The Buffett Indicator: FAIRLY VALUED
#3. CAPE
The Cyclically adjusted price-to-earnings ratio (CAPE) compares the total price of the stock market to the average earnings of the market over a 10 year average. Within our brokerage accounts we can see the P/E ratio, however the CAPE is not displayed.
CAPE: OVERVALUED.
#4. The Federal Funds Rate
With the amount of attention this gets in financial news, we might think that the federal funds rate will cause the market to go up and down. Let’s look at this graph below on how the federal funds rate has effected the U.S. stock market.
As you can see from the picture above the federal funds rate will make the market adjust up and down. But this increase or decrease will only last for a day or so.
It is impossible to no when to buy and sell stocks based off the rate hikes.
Federal Funds Rate: FAIRLY VALUED
#5. Margin Debt
Margin Debt is the measurement of investors’ greed.
Determining margin debt is based off the how much debt is being used to invest in stocks. The current market shows that less investors are using loans because of the economic climate. There was a $313 million decrease in loans Sept 2022.
Margin Debt: UNDERVALUED
#6. S&P500 Mean Reversion
The S&P500 mean reversion model states that the stock market will return to it’s historical average trendline.
The further up from the trendline the more overvalued the market is.
The further down from the trendline the more undervalued the market is.
Currently, the market is 30% above the historical trendline.
S&P500 Mean Reversion: FAIRLY VALUED
This is because is with in the standard deviation of 1.
The Breakdown of Indicators
2 Overvalued
3 Fairly Valued
1 Undervalued
What Does This All Mean
Is the U.S. stock market at it’s absolutely lowest point and we should buy?
Well, your guess is as good as mine along with all the “professional investors”.
The stock market is UNPREDICTABLE!!
Your best bet is to use this information as a tool to weigh your best options when buying and selling in the stock market.
In a later article we will talk about a safe and effective way to invest your money in the stock market called Dollar Cost averaging.
Until then, if you are looking for some side hustles to make some money check out this huge list of side hustle!
