Is the stock market overvalued?
There is no single number that proves it, but a handful of time tested gauges show how stretched stock prices are, a second set shows whether the economy is near a downturn, and a third set shows the inflation and interest rate backdrop. Stockslash tracks them on one live dashboard.
How to read the dashboard
Each gauge is graded against its own history, not against a fixed target. Green means it is calm or normal, amber means it is getting stretched, and red means it is at a risky extreme. The valuation gauges tell you how expensive stocks are, the macro gauges tell you whether a recession looks close, and the inflation and rates gauges show the monetary backdrop.
Shiller CAPE
Share price divided by ten years of inflation adjusted earnings. It smooths out good and bad years so one strong year does not fool you. Its long run average is around 17. The higher it climbs above that, the more expensive stocks are compared with their earnings. Its highest readings have tended to come before major market peaks.
The Buffett indicator
The total value of the US stock market divided by the size of the economy. Warren Buffett called it the best single measure of valuation. Around 100 percent is roughly fair. Well above that means stocks are pricey compared with the real economy.
Equity risk premium
How much more you earn owning stocks instead of safe government bonds. When it is high, stocks look attractive. When it is thin, you are taking stock risk for little extra reward.
Margin debt
How much money investors have borrowed to buy stocks, measured against the economy. Heavy borrowing adds fuel on the way up and forces selling on the way down. Record levels are a classic late cycle warning.
The yield curve
The gap between the ten year and three month government bond rates. When short rates rise above long rates the curve inverts, which has come before most recessions. A positive gap is calmer.
The Sahm rule
A simple recession alarm based on how fast unemployment is rising. It triggers at 0.50. Well below that means the job market is still steady and no recession is signaled.
Jobless claims
The number of people filing for unemployment each week. Low and steady claims point to a healthy job market. A fast rise is one of the earliest signs of trouble.
Financial conditions
The Chicago Fed combines credit, borrowing, and market stress into one number. Below zero means money is easy to get and markets are calm. Above zero means conditions are tightening.
Inflation
The Consumer Price Index measures how fast prices are rising versus a year ago. The Fed aims for about 2 percent. Faster inflation eats into returns and often forces higher interest rates, which weigh on stocks.
Inflation expectations
The 10-year breakeven rate shows what bond markets expect inflation to average over the next decade. It is forward looking, so it can move before official inflation data does.
Interest rates
The Federal Reserve's policy rate sets the cost of money. Higher rates slow borrowing and spending and make safe bonds more attractive than stocks. Lower rates do the opposite.
Money supply
M2 tracks how much money is in the system, measured against a year ago. Fast growth adds fuel to markets, while a rare shrinking of the money supply tightens financial conditions.
Putting it together
Read it as a few questions. How expensive are stocks, from the valuation gauges, is the economy under strain, from the macro gauges, and is money tightening or easing, from the inflation and rates gauges. They do not have to agree. As a rule of thumb, valuation gauges hint at how big a fall could eventually be, while the macro and rates gauges help with the timing and the backdrop. The dashboard shows where each gauge stands today, so you can read them and judge for yourself.
Frequently asked questions
How can I tell if the stock market is overvalued?
Compare gauges like the Shiller CAPE and the Buffett indicator with their own long run history. The further above their norms they sit, the more expensive the market. The live dashboard shows where each one stands so you can judge for yourself.
What is the best single indicator of an overvalued market?
There is no perfect one. The Shiller CAPE and the Buffett indicator are the two most widely followed long term valuation gauges, which is why people tend to watch them together.
Does a high valuation mean a crash is coming?
No. A high valuation raises the possible size of a future fall, but it does not say when. Macro gauges like the yield curve and jobless claims are better suited to timing.
How can I tell if a recession is near?
Watch the macro gauges, such as the yield curve, the Sahm rule, and jobless claims. They have historically moved before downturns. The dashboard shows where each one stands so you can read them yourself.