Chart of the Month: Stock Valuations are Stretched by this Measure
Source: Federal Reserve Bank of St. Louis
One of Warren Buffett’s favorite valuation measures, Stock Market Capitalization to Gross Domestic Product, is flashing a warning sign for stocks. This simple valuation measure is used to assess whether a country’s stock market is overvalued or undervalued, compared to its historical average. Generally speaking, when the ratio falls below the 75% level, stock prices are considered attractive. Conversely, when the ratio is above 100%, stock prices are considered expensive. While this ratio has varied widely throughout history, U.S. stock prices are at one of their highest levels in the last 50 years—surpassing the peaks reached during the internet bubble in the late 90’s and the financial crisis in 2008. While no single metric can accurately predict future stock market performance, this indicator’s current level suggests it may be a smart idea to consider positioning your retirement portfolio a little more defensively in the coming months.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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