US Market Remains Significantly Overvalued Despite Black Friday Slip

Stocks slump amid fears of global economy slowdown
November 26, 2018
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November 26, 2018

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 (TradesPortfolio)’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.