Looking Very Very Long Term, This Data Suggests US Stocks Are 50% Overvalued

Looking Very Very Long Term, This Data Suggests US Stocks Are 50% Overvalued
Andrew Rummer

over 2 years ago1 min

Mentioned in story

Looking back at 150 years of returns in the US stock market suggests the S&P 500 is currently 50% higher than it should be, according to a report this week from research firm TS Lombard

The chart above plots the S&P 500’s so-called Real Value Index (RVI), returns from both price appreciation and dividend payments adjusted for inflation. Over a century and a half, these inflation-adjusted returns have averaged a healthy 6.6%. 

This RVI “shows remarkable consistency over time, holding to the trend line shown in the chart above through thick and thin, including two world wars, the 1970s ‘great inflation’, the Cold War, and large variations in real growth rates,” TS Lombard wrote. “The RVI’s 6.6% real return makes it therefore one of the few constants of American capitalism.”

However, as you can see more clearly in the chart below, the S&P 500 is currently 50% above where that long-term trend suggests it should be. But while that may sound worrying, history suggests the market can remain above trend for many years at a time. 

S&P 500 RVI’s deviation from long-term trend
S&P 500 RVI’s deviation from long-term trend

While this data is of little use in timing when precisely to enter or exit the stock market – after all, the peak in 2007 was only 22% above trend – it does suggest that returns over the next decade or so are likely to be below that historical 6.6% level. 

“The current premium to trend of 50% is not in itself a sell signal,” TS Lombard reckons. But the return “investors can expect is higher if investing when the market is below trend, and lower if investing when the market is above trend (as now).”



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