Two Major Concerns About Overvalued Stock Market Prices

Stock Market 60 OvervaluedThe amount of money investors are borrowing to buy stocks is skyrocketing.

In September of this year, margin debt on the New York Stock Exchange (NYSE) stood at $483.87 billion—a new record-high. When the stock market was forming a top in 2007, margin debt was at a “then” record-high of $329.51 billion. Margin debt on the NYSE is now 47% higher than just before the previous big market sell-off. (Source: New York Stock Exchange web site, last accessed November 10, 2014.)

And according to the S&P 500 Shiller P/E multiple (a measure of the value of stocks compared to inflation-adjusted earnings), stocks are very expensive. As of November 6, this multiple stood at 26.51; this means that for every $1.00 a company makes, investors are willing to pay $26.51.

From a historical perspective, using this indicator, stocks are severely overvalued.

Since 1881, the stock market has surpassed this valuation ($26.51) only 5.9% of the time. The last time the S&P 500 was above this level was in October of 2007—again, just before the last big market sell-off. Looking at the historical average of the Shiller P/E multiple of 16.57, the current stock market is overvalued by 60%. (Source: Yale University web site, last accessed November 10, 2014.)

While the above time-proven market indicators are enough to worry about, other indicators are flashing stock market overvaluation warnings, too, including, but not limited to: stock market advisor bullishness at historical high levels, the VIX “fear” index back near record-low levels, and bond funds increasing their risk by investing in the stock market.

Dear reader, the higher the stock market goes, the bigger the market sell-off is going to be. As I have said on multiple occasions here: the only thing that kept the stock market alive was money printing. That’s over now.

November and December are generally good months for the stock market. But we must face the facts going into 2015; the big rebound we had in stocks following the 2009 lows is stalling here in 2014. With money printing off the table for now and the Federal Reserve having warned of higher interest rates in 2015 and 2016, how can stocks move higher?