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James Li
James Li
Articles (729)  | Author's Website |

US Market Remains Significantly Overvalued Despite Black Friday Slip

Energy and tech continue deep slide, but Shiller price-earnings ratio still remains around 30

The U.S. stock market remains significantly overvalued the day after Thanksgiving despite tumbling on low oil prices and continued slides in tech shares like Apple Inc. (NASDAQ:AAPL), Facebook Inc. (NASDAQ:FB) and Google parent Alphabet Inc. (NASDAQ:GOOGL)(NASDAQ:GOOG).

Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator stood at 131.7%, down from Nov. 2’s reading of 135.4% yet still above the “significant overvaluation” threshold of 115%.

Oil prices and tech shares drag Dow lower

The Dow closed at 24,285.95 at noon, down approximately 0.73% from Wednesday’s close of 24,464.69. Lower oil prices, which dropped near its 52-week low of $55.63, pressured stock futures. For example, Exxon Mobil Corp. (NYSE:XOM) closed 2.66% lower from its previous close of $77.57.


According to CNBC, Spartan Capital Securities Chief Market Economist Peter Cardillo said while tech shares are pressured, collapsing oil prices present a “more troubling” issue for the economy. Cardillo also mentioned OPEC is indicating a further production cut, a warning sign that oil prices might stay under pressure.

Shiller price-earnings ratio stays near 30

Yale professor Robert Shiller introduced an alternative market valuation ratio that compares the price of the Standard & Poor’s 500 index to the inflation-adjusted earnings of the 500 companies in the index. As of Friday, the market Shiller price-earnings ratio is 29.7, approximately 75.7% higher than the historical mean of 16.9. Based on this valuation level, the U.S. stock market is expected to return -1.8% per year over the next eight years. By contrast, the 10-year Treasury yield is approximately 3.14%.



With a Shiller price-earnings ratio of 19, the energy sector remains the least overvalued sector among the 11 market sectors. Other sectors that are slightly undervalued compared to the overall market include consumer defensive and industrials.

Disclosure: No positions.

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About the author:

James Li
I am an editorial assistant and researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website

Rating: 5.0/5 (3 votes)



Low Tide Investments
Low Tide Investments premium member - 4 months ago

One could argue that the Schiller P/E is not useful in this market cycle anymore because we have surpassed the trough of the financial crisis. As you know, the Schiller P/E uses the 10 year average earnings on the S&P 500 in order to account for market cycles.

If the current Schiller P/E does not include a contraction, is it truly useful?

Low Tide Investments
Low Tide Investments premium member - 4 months ago

Nevertheless, I do agree that the Schiller P/E is useful to a certain extent... the Schiller P/E has found not to be useful for market timing, however.

It somewhat contradicts the traditional value investing philosophy of not trying time the market. We all know the opportunities will be plentiful when we do enter a recession, and that opportunities are scarce when the market is at all time highs. But will our behavior change when we reach those points?

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