Is the U.S. Stock Market Overvalued?
According to FactSet, the forward 12-month P/E ratio for the S&P 500 is 20.7.
This P/E ratio is above the 5-year average (19.2) and above the 10-year average (17.8).
I drew the arrows on the chart to point out that the stock market is relatively overvalued, but as it did post-2020, markets can remain overvalued for a year or longer.
Legendary economist John Maynard Keynes said,
The markets can remain irrational longer than you can remain solvent.
Keynes's intention was to warn investors not to bet against the market based on weak economic or political factors, as he had learned the markets could ignore these fundamentals for longer than he could afford to maintain a short position.
Yes, fundamental analysts would say the stock market is overvalued, but what are you going to do about it?
If you're invested in stocks or stock funds, you have exposure to the risk of loss.
But like anything else that's a derivative of the price trend, fundamental valuation measures can lead you astray and stay wrong for a long time.
To manage and mitigate market risks, we must necessarily focus on the direction of price trends to determine our exit early in the stage of downtrends or apply asymmetric hedging systems.
Mike Shell is the founder, president, and chief investment officer of Shell Capital Management, LLC, and the portfolio manager of Asymmetry® Managed Portfolios. Shell Capital Management, LLC, is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies. Shell Capital provides investment advice and portfolio management to clients with separate accounts at Goldman Sachs Advisor Solutions with an investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not individualized advice and is subject to change without notice. Investing involves risk, including the potential loss of principal, which an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise the implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. If this website contains information regarding options trading, please read the Characteristics & Risks of Standardized Options, also known as the Options Disclosure Document (ODD). Options involve risk and are not suitable for all investors. The views and opinions expressed in Asymmetry® Observations and Asymmetric Investment Returns are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.