As the accompanying article spells out, the Value Line Manager’s Appreciation Potential statistic is now 20%. This suggests that the stock market is more overvalued than it has been since 1969.
Read the article here.
The Value Line Appreciation Statistic has been giving off overvaluation signals since 2013. It’s been screaming of imminent disaster since 2015. THIS IS WHY we have been so conservatively allocated. Yet, in hindsight, our allocations have been too conservative because not even the VLMAP can beat central bank stimulus.
As the article indicates, the VLMAP statistic has also been accurate in the long term.
In my 2012 book, “Dollars and Common Sense: Taking Charge of Your Investments in the Tumultuous 21st Century”, I wrote on page 166:
- The Value Line Estimated Median Appreciation Potential statistic is BELOW 50%.
- The Price/Earnings ratio for the S&P 500 or its proxy index mutual funds is OVER 20.
Move back to the next-lowest risk level in your portfolio allocation, and adjust your portfolio accordingly.”
The Price/Earnings ratio for the S&P 500 is now 22.85.
Classically, this suggests a rather large downturn is ahead. But the VLMAP and the P/E statistics also hinted at downturns in 2013, 2014, 2015, 2016, and 2017, albeit not as extremely as they are now. Central banks won the day, and now investors are convinced that they will always save us. Always. But what if investors’ expectations are wrong?
If, like the proverbial broken clock which is right twice a day, we DO experience a substantial correction in the financial markets, then we are poised to take advantage. If stocks are worth owning for their wealth-creating power now, then the same will be true when they are cheaper. Patience. Our portfolios are already relatively safely allocated.