September 23, 2024
The stock market’s overall valuation relative to its underlying earnings is around the highest level in recorded history.
According to the cyclically adjusted price-to-earnings ratio, or CAPE Ratio, only the dot-com bubble peak and late 2021 were more expensive times for stocks. In December 1999, the CAPE Ratio was 44.2. In late 2021, it was 38.6.
As of this writing, it’s 35.2.
It was only 32.6 in September 1929, right before the Great Depression. So, the risk of a major decline in U.S. stocks is higher now than at any time since late 2021.
Bear markets have generally followed times of extreme valuations. And there have been some brutal sideways markets, where stocks go nowhere, sometimes even for decades.
Consider how after the dot-com peak, the Nasdaq Composite Index took 15 years to reach a new high. Also, the Dow Jones Industrial Average didn’t hit a new high for 25 years after the 1929 peak. And in one of the worst examples, the Japanese stock market took 34 years to make a new high after it peaked in 1989.
Right now, the bond market is in a multiyear funk. It peaked in 2020 and is still trying to regain ground after some hefty losses. When will it fully recover? Time will tell.
Based on the market’s froth of late, none of these high valuation fears seem to matter to investors. Markets can drop after interest rate cuts begin, so it may be time to be careful.