{"id":140932,"date":"2020-12-24T16:33:37","date_gmt":"2020-12-24T13:33:37","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/opinion-do-record-low-interest-rates-justify-the-stock-markets-overvaluation-heres-the-answer\/"},"modified":"2020-12-24T16:33:37","modified_gmt":"2020-12-24T13:33:37","slug":"opinion-do-record-low-interest-rates-justify-the-stock-markets-overvaluation-heres-the-answer","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/opinion-do-record-low-interest-rates-justify-the-stock-markets-overvaluation-heres-the-answer\/","title":{"rendered":"#\n  Opinion: Do record-low interest rates justify the stock market\u2019s overvaluation? Here\u2019s the answer"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_84 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a23e50582b5c\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a23e50582b5c\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/opinion-do-record-low-interest-rates-justify-the-stock-markets-overvaluation-heres-the-answer\/#Mark_Hulbert_subjects_the_bull_case_to_historical_scrutiny\" >Mark Hulbert subjects the bull case to historical scrutiny<\/a><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/buradabiliyorum.com\/en\/opinion-do-record-low-interest-rates-justify-the-stock-markets-overvaluation-heres-the-answer\/#Sleight_of_hand\" >Sleight of hand<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-6'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/buradabiliyorum.com\/en\/opinion-do-record-low-interest-rates-justify-the-stock-markets-overvaluation-heres-the-answer\/#Status_of_valuation_indicators\" >Status of valuation indicators<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/buradabiliyorum.com\/en\/opinion-do-record-low-interest-rates-justify-the-stock-markets-overvaluation-heres-the-answer\/#Mark_Hulbert\" >Mark Hulbert<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<p>&#8220;<strong>#<br \/>\n  Opinion: Do record-low interest rates justify the stock market\u2019s overvaluation? Here\u2019s the answer<br \/>\n<\/strong>&#8221;<\/p>\n<h2 class=\"article__subhead\" itemprop=\"alternativeHeadline\"><span class=\"ez-toc-section\" id=\"Mark_Hulbert_subjects_the_bull_case_to_historical_scrutiny\"><\/span>\n  Mark Hulbert subjects the bull case to historical scrutiny<br \/>\n<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><\/p>\n<div class=\"column column--full article__content\">\n<div id=\"js-article__body\" class=\"article__body article-wrap at16-col16 barrons-article-wrap\" itemprop=\"articleBody\" data-sbid=\"813908A4-45E8-11EB-80FB-D85324CB2272\">\n<div class=\"barrons-article-ad-wrapper\">\n<div data-track=\"barrons-article-ad-wrap\" class=\"barrons-article-ad sticky_item\">\n<div class=\"barrons-main-article-ad-target sticky_target body_ad\" aria-hidden=\"true\"><\/div>\n<\/p><\/div>\n<\/p><\/div>\n<p>       The stock market is even more overvalued today than it was a month ago.<\/p>\n<p> That was when I last reviewed the status of eight of the most widely followed valuation indicators. The table, below, summarizes these indicators\u2019 latest readings and where they stand in a historical context.<\/p>\n<div class=\"paywall\">\n       Since most of these indicators a month ago were already indicating that the market was more overvalued than at any time in recent U.S. history, this month\u2019s update hardly seems noteworthy. Equities have been overvalued for several years running, and yet the market averages keep on rising.<\/p>\n<p>How boring, even if dangerous.<\/p>\n<p>I\u2019m therefore devoting this month\u2019s valuation update \u2014 a regular feature in this space \u2014 to the most common comeback I get from readers when I report the market\u2019s extreme overvaluation: If I only took interest rates into account, I\u2019d discover that the market is not overvalued.<\/p>\n<p>This is a convenient story for the bulls to tell themselves, since interest rates are at historically low levels. Unfortunately there is precious little historical support for it.<\/p>\n<p>Consider what I found upon measuring the predictive power of each of these valuation indicators, calculating a statistic known as the r-squared (which ranges from a low of 0%, or no explanatory power, to 100%, or complete explanatory power). In each case I calculated the r-squared in two ways: Once when focusing on the indicator by itself, and then a second time in conjunction with prevailing interest rates.<\/p>\n<p>It turns out that none of these indicators\u2019 r-squareds significantly changed upon taking interest rates into account. To illustrate, consider the so-called Buffett Indicator, which is the ratio of the total market cap of the U.S. market divided by gross domestic product. Its r-squared is 47% when used to predict the S&amp;P 500\u2019s<br \/>\n        SPX,<br \/>\n        <bg-quote field=\"percentchange\" format=\"0,000.00%\" channel=\"\/zigman2\/quotes\/210599714\/realtime\" class=\"positive\">+0.07%<\/bg-quote><br \/>\n      \u00a010-year inflation-adjusted total return, which is higher than the r-squared of any of the other indicators in the table below.<\/p>\n<p>When adjusting the Buffett Indicator by the real interest rate (the 10-year Treasury\u2019s yield minus the CPI\u2019s change over the last 12 months), its r-squared is essentially unchanged, at 48%. But that\u2019s not even the half of it: In an econometric model that includes both the Buffett Indicator and real interest rates, lower rates are associated with <em>lower<\/em> subsequent 10-year returns \u2014 not higher.<\/p>\n<p>Upon including just the Buffett Indicator in this econometric model, for example, the S&amp;P 500\u2019s projected 10-year inflation-adjusted total return is minus 9.3% annualized. Upon including real interest rates in the model, the projection worsens to minus 10.4%.<\/p>\n<div id=\"cx-membership-tile\"><\/div>\n<p>Are you surprised by this result? You shouldn\u2019t be. Persistently low interest rates indicate that the markets expect future economic growth to be anemic at best. Far from celebrating what today\u2019s low interest rates mean, the bulls should be worried.<\/p>\n<h6><span class=\"ez-toc-section\" id=\"Sleight_of_hand\"><\/span>Sleight of hand<span class=\"ez-toc-section-end\"><\/span><\/h6>\n<p>How could the bulls be so wrong when arguing that low rates justify higher valuations? My hunch is that, either consciously or unwittingly, they are guilty of a sleight of hand. They in effect are confusing two very distinct historical tendencies:<\/p>\n<p>\u2022 What h<a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>ens to stock market valuation ratios as interest rates decline<\/p>\n<p>\u2022 What is the stock market\u2019s future return when interest rates are low<\/p>\n<p>Notice that the first is referring to a coincident tendency while the second refers to a forward-looking tendency. Yes, valuation ratios tend to rise as interest rates fall. But that is entirely distinct from what happens in the years subsequent to when interest rates are already low.<\/p>\n<p>Another way of appreciating this subtle point: In order to exploit the first tendency for market-timing purposes, you\u2019d have to know where interest rates are headed. Good luck with that.<\/p>\n<p>The bottom line? The stock market is overvalued, period. Far from allowing us to wriggle out from underneath the bearish weight of that overvaluation, today\u2019s low interest rates add fuel to the fire.<\/p>\n<h6><span class=\"ez-toc-section\" id=\"Status_of_valuation_indicators\"><\/span>Status of valuation indicators<span class=\"ez-toc-section-end\"><\/span><\/h6>\n<p>The table below reports the latest values of the eight indicators I report each month in this space. For a full description of how each of the indicators is calculated, please refer to my Oct. 30 column.<\/p>\n<div data-layout=\"\n              inline\" data-layout-mobile=\"\" class=\"\n        media-object\n        type-InsetMediaIllustration\n            full-width\n            \n    \n          \n  article__inset\n        article__inset--type-InsetMediaIllustration\n            article__inset--inline\n  \"><\/p>\n<figure class=\"\n        media-object-image\n        enlarge-image\n        renoImageFormat-20201224082102\n        img-inline\n        article__inset__image\n      \" itemscope itemtype=\"http:\/\/schema.org\/ImageObject\"><\/p>\n<div style=\"padding-bottom:42.9224%;\" data-mobile-ratio=\"42.9224%\" data-layout-ratio=\"42.9224%\" data-subtype=\"illustration\" class=\"image-container  responsive-media article__inset__image__image\">\n        <img decoding=\"async\" srcset=\"https:\/\/ei.marketwatch.com\/Multimedia\/2020\/12\/24\/Photos\/NS\/MW-IW930_hulber_20201224082102_NS.png?uuid=ded64a60-45ea-11eb-8d84-001cc448aede 1260w\" sizes=\"1260px\" src=\"https:\/\/ei.marketwatch.com\/Multimedia\/2020\/12\/24\/Photos\/NS\/MW-IW930_hulber_20201224082102_NS.png?uuid=ded64a60-45ea-11eb-8d84-001cc448aede\" data-enlarge=\"https:\/\/ei.marketwatch.com\/Multimedia\/2020\/12\/24\/Photos\/NS\/MW-IW930_hulber_20201224082102_NS.png?uuid=ded64a60-45ea-11eb-8d84-001cc448aede\" alt=\"\" title=\"\"><\/div><figcaption class=\"wsj-article-caption article__inset__image__caption\" itemprop=\"caption\"><\/figcaption><\/figure>\n<\/div>\n<p>       <em>Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/news\/\" data-internallinksmanager029f6b8e52c=\"2\" title=\"News\" target=\"_blank\" rel=\"noopener\">news<\/a>letters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.<\/em><\/p>\n<div data-layout=\"\n              inline\" data-layout-mobile=\"\" class=\"\n        media-object\n        type-InsetCommentingPromo\n            \n            inline\n  article__inset\n        article__inset--type-InsetCommentingPromo\n            article__inset--inline\n  \"><\/p><\/div>\n<\/p><\/div>\n<\/div><\/div>\n<p><\/p>\n<div class=\"byline article__byline\">\n<p>      <span>By<\/span><\/p>\n<div class=\"author  hasMenu\" data-scrim='{\"type\":\"author\",\"header\":\"Mark Hulbert\",\"subhead\":\"The Wall Street Journal\",\"list\":[]}' itemscope itemprop=\"author\" itemtype=\"http:\/\/schema.org\/Person\">\n<h4 itemprop=\"name\"><span class=\"ez-toc-section\" id=\"Mark_Hulbert\"><\/span>Mark Hulbert<span class=\"ez-toc-section-end\"><\/span><\/h4>\n<\/p><\/div>\n<\/div>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. Follow us on\u00a0<span style=\"color: #ff0000;\"><a style=\"color: #ff0000;\" href=\"https:\/\/news.google.com\/publications\/CAAqBwgKMLG0nwswvr63Aw\" target=\"_blank\" rel=\"nofollow noopener noreferrer\">Google News<\/a><\/span>\u00a0too, click on the star and choose us from your favorites.<\/span><\/strong><\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\">For forums sites go to <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/forum.buradabiliyorum.com\/\" target=\"_blank\" rel=\"noopener\">Forum.BuradaBiliyorum.Com<\/a><\/span><\/strong><\/p>\n<\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\"><strong>If you want to read more News articles, you can visit our <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/en.buradabiliyorum.com\/news\/\" target=\"_blank\" rel=\"noopener\">News category.<\/a><\/span><\/strong><\/p>\n<\/blockquote>\n<p><span style=\"color: black;\"><a style=\"color: #ff9900;\" href=\"http:\/\/www.marketwatch.com\/news\/story.asp?guid=%7B813908A4-45E8-11EB-80FB-D85324CB2272%7D&#038;siteid=rss&#038;rss=1\" target=\"_blank\" rel=\"noopener\">Source<\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;# Opinion: Do record-low interest rates justify the stock market\u2019s overvaluation? Here\u2019s the answer &#8221; Mark Hulbert subjects the bull case to historical scrutiny The stock market is even more overvalued today than it was a month ago. That was when I last reviewed the status of eight of the most widely followed valuation indicators&#8230;.<\/p>\n","protected":false},"author":1,"featured_media":140933,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"","fifu_image_alt":"","footnotes":""},"categories":[70897],"tags":[],"class_list":["post-140932","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/140932","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=140932"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/140932\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/140933"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=140932"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=140932"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=140932"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}