hi I'm Jimmy in this video we're looking
at whether or not the stock market is
still overvalued we're going to look at
the traditional priced earnings ratio
for the stock market in general we're
going to look at the cape ratio and
we're also going to look at the Buffett
indicator all three of these take
slightly different approaches to trying
to understand whether or not the broader
stock market is overvalued or
undervalued now clearly this is
important because the stock market since
the start of the year is down a decent
amount in fact this S P 500 is down
about 23 percent
and the nasdaq's down even worse the
nasdaq's down a bit over 32 percent I
believe year to date so of course The
Logical question is is it overvalued but
before we get into that I just want to
tell you real quick about a website that
we're building where it'll be quicker
and easier to to not only value stocks
but also research stocks in general so
the first step that we're building to
this investing platform is going to be
the valuation side we've already built
the discounted cash flow calculator and
we're gradually going to introduce new
valuation methods and at some point
we're going to have like income
statements balance sheets we're going to
have the full ability to research stocks
there but for now the idea is that when
you punch in a ticker what will happen
at some point is you're punch in the
ticker it'll tell you what the best
valuation methods are and it'll give you
what the fair value is for each of those
valuation methods and we're going to get
it to work for all different types of
stocks so no matter what kind of company
we're looking at the computer will
recognize well for that type of company
here's the valuation method here's the
top three valuation methods that you
should use and here's what the fair
value should be for now we've already
got the discounted cash flow calculator
working which works very well for many
larger to mid-sized companies more
established companies so if you'd like
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sign up but for now let's jump over to
our very first broader stock market
valuation method so this is the chart of
the p e ratio for the s S P 500 going
all the way back to the 1950s and if we
were to take the average p e ratio
through this entire time period Well we
end up with an average p e of about 17x
now I'm not sure that this is a
completely logical move because
if we would go back this far the broader
economic situation in so many different
time periods were very different for
example back in this time period well
this was before America was off the gold
standard so clearly things were a bit
different back in this time period well
this was the late 70s early 80s and for
example interest rates were double
digits if we're going to go get a
mortgage well a mortgage could cost us
at its peak about 18 for 30-year fixed
mortgage today mortgage rates have gone
up but they're at about six or seven
percent now so it's drastically
different to include all those time
periods so I think a more logical thing
is to look at the p e ratio on a rolling
average
so this is a chart of the S P 500 going
back to 2012. now the current p e ratio
is about 18x so that's 18 times 18 times
each dollar of profit is what is
currently was where the S P 500 is
currently at if we were to take a
rolling average of 20x well 20x on a
rolling period implies that right now
the stock market would be slightly
undervalued we know because 20x is that
the 18x is lower than the 20x
and if it was if the market had been
priced at about 20x it would roughly
follow that yellow orangish line and we
can see that broadly speaking outside of
the disconnect that happened coming out
of 2020 well outside of that time period
that's been about where it's at I think
that the 20x is a reasonable number to
use now if we would have tried let's say
17x or we can see that 17x well there's
a couple time periods specifically when
the market crashed back in early 2020
that buying the S P 500 would have made
sense but I think 17 and a half X is
actually too low of a number to use
because we could see that if that's the
case the market has been pretty
overvalued through most of this time
period Well if we were to look at
something even lower 14x well clearly
that just doesn't make any sense that
would imply that the stock market's been
overvalued pretty much for the entire
past decade
and even if that even if we thought that
was true
it's really an irrational thing to go on
because we would have missed all of the
moves of the past decade then what if we
were to go higher well then we get 22
and a half X now personally I think 22
and a half X is a bit too high
but you could make the case that the
stock market actually I don't see how
you can make that case never mind if we
were to go up another one to 26x again
it's a little bit ridiculous that would
have implied that when the market was at
its peak well that was about fairly
valued and to me that's just a little
bit silly so I think that using the 20x
the orange yellowish line here makes the
most sense I think that there was a good
the stock market was a good buy back
when the things dipped in 2020 and there
were multiple goodbyes during the past
decade or so that would have been
fantastic buys that would have we could
have bought below 17x but if we'd use
20x as our guiding principle well
broadly speaking it would have worked
over the long run now that would also
imply that right now the stock market is
a bit
undervalued not undervalued but maybe
the market went too far with correcting
itself but before we jump into before we
look before we bite into that completely
let's look at the cape ratio so the cape
ratio is short for cyclically adjusted p
e ratio and basically uh Schiller uh
Robert schill is the guy who put it out
he has he publishes every month what
information uh you need to calculate
this ratio and using as you can see it
goes all the way back to 1902.
but basically what it does is it takes a
rolling average of earnings which is
probably more stable less volatile than
individual earnings at any given quarter
it also adjusts things for inflation so
it's an inflate inflation-adjusted
number which again makes a lot of sense
given the current High inflationary
environment well right now the cape
ratio is sitting at about 27x which
when we compared to its long-term
average again I'm just taking a straight
average here it's way above 17x
but obviously if I thought it was
irrational to go back to 1954 or
whatever in 1952 we went with the last p
e ratio going back to 1902 using this
same average holding the the markets to
the same standard all the way through
doesn't make any sense in this case over
the past decade the only time would have
to really buy this one this is even
going to go in the back the past 15
years would have been back in 2008. to
me that's a little bit crazy so again I
think a rolling average makes more sense
and here based on the current average of
27x well it looks like the stock market
is right around fairly valued it's
slightly overvalued right now according
to the cape ratio and again this is uh
adjusted so they adjusted for inflation
and and uh rolling average of earnings
but we could see that on a 10-year
rolling p e ratio Cape ratio you end up
about where it's supposed to be the two
the Orange Line in the blue line the
converging so that's about where it's
supposed to be now
now one question one hesitation I had
when I was looking at that is 10 years
usually makes sense the market tends to
correct every eight or so years
but the past eight or so years they
they're outside of covid there wasn't a
real big correction the market went on a
long Bull Run so perhaps 10-year average
isn't fair maybe it makes more sense to
use a 15-year average and when we use a
15-year average well it implies that the
stock market is slightly overvalued
right now 27x should be about 26x so I
think that using this one there's a bit
more room for the stock market to fall
okay now let's look at the Buffett
indicator so the Buffett indicator is
basically it's GDP how big is the
economy how's the economy growing
relative to the market cap of the stock
market we use the Wilshire 5000 for this
and basically it's a broad basket of
stocks and how do the two compare to
each other if it was a hundred percent
that would mean the GDP is the same size
as the basically the stock market and
well it hasn't been that way for a while
it did dip below it back in 2008 but it
hasn't been that way for a while
that being said right now the Buffett
indicator sitting at about 146 percent
this is going off the most recent
quarter numbers uh I believe the second
quarter of GDP numbers are out and those
are the numbers we used I think we
updated this for the second quarter and
when we compare this to the average once
again we'll just take a basic average it
looks like the average is about 83
percent
again though a little bit silly
especially when we consider that the
real low Point here the numbers really
dragging this down was back in the 80s
when interest rates were up again we get
a mortgage at 18 at one point but a 15
mortgage was very common back then so
with such high interest rates you'd have
to have a higher a creative required
rate of return the stock market should
be lower interest rates all of them are
lower these days so the stock market
should be higher so to hold this to the
same stand unless we think interest
rates going back to 18 which I think in
the near term is probably unlikely
unless we believe that it looks like
this would probably be again an
irrational number to use again I think a
rolling average makes much more sense so
the 10-year rolling average has the
Buffett indicator saying it should be
about 136 percent and again if we don't
think that the 10-year rolling average
is a reasonable thing to do well we
could go 15 years that way we at least
include the Great Recession or the
financial crisis of 0809 so we include
all of those within our numbers and just
like that that implies that the stock
market should be at about 118 percent of
GDP once again making it seen that the
stock market is overvalued at the
current level although I don't think
that it's quite as overvalued as as many
headlines that I've seen recently a lot
of headlines that I've seen have implied
that this thing should keep falling and
perhaps get cut in half from here but
that is only true if we're holding this
if we're if we're sticking with what the
long-term historical average is or over
the past 50 or 60 years when a lot has
changed in the past 50 or 60 years so
I'm not sure those are fair comparison I
think 15 years is very reasonable so I
think in a continued dip at least some
is possible
is it possible that the Old Market
continues to overreact to it sure but I
think that our biggest move here is to
look for great investment opportunities
great value stocks that we plan on
holding now and buying for a very long
time that way the stock market can do
what it's done for the past 50 or so
years and continue to climb high higher
although albeit a bit volatile now if
you'd like to join our investing website
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have a link right here and thank you so
much for sticking with me all the way to
the end of the video I really do
appreciate it thank you and I'll see in
the next video