HUSSMAN: MORE EVIDENCE OF GROSS OVERVALUATION
Courtesy of The Pragmatic Capitalist
In his latest letter John Hussman said the market was over 40% overvalued. Well, he’s tracked down more evidence to prove his point. This time Mr. Hussman points to Tobin’s :
“More sober and historically reliable measures of market valuation create a much more challenging picture. Apart from our own measures, which indicate continued overvaluation, there are several good indicators of market valuation that are not overly sensitive to year-to-year fluctuations in profit margins. One is based on the 10-year average of actual net (not operating) earnings, which is advocated by economist Robert Shiller, and another is Tobin’s “q” ratio which is based on comparing market value to replacement cost, and is advocated by Andrew Smithers. Both of these measures largely agree with our own measures, both presently and on a historical basis. Based on last week’s valuations, both suggest that the S&P
500 is substantially overvalued.”
“[Geek’s Note: The chart above is based on the ratio of the CAPE and q to their respective historical averages. Note that the axis is logarithmic, so the level of 0.4 corresponds to a valuation ratio of exp(0.4). This is about 1.5, or 50% overvalued. In contrast, major secular buying opportunities as we observed about 1950 and again in 1974 and 1982 occurred at values of about -0.6, which corresponds to a ratio of log(-0.6). This is about 0.55, implying that the market at those points was about 45% below historical norms.]“
Source: Hussman Funds
