Hi everyone and welcome to another Wealthy and Wise Wednesday. Glad you could join us for our podcast.
We’re pushing into the Christmas season. We’re just a…gee…we’re just a few weeks away. Always excited for the Christmas season especially with family coming home and all that good stuff. Our youngest daughter is away at college and she’ll be home with us for a few weeks and I’m definitely looking forward to that. Looking forward to hanging around with the grandkids and watching all those innocent and surprised looks when it comes to Christmas time.
So pushing the end of 2017. I hope it’s been a good 2017 for you. I hope it’s been prosperous. And I hope more than that, I hope 2018 looks really good for you and that you’re making some good steps, good financial stabs to make it the best 2018 ever.
And we were under a lot of pressure right now with what’s going on in our economy and everything. We’ve got the Dow is, man, near its all-time high over 24,100. I mean, it’s just crazy. I remember, gosh, when I first started, I think the Dow is about 500 or 600. I don’t know. You see, it’s crazy what’s happened over these years. And now over 24,000. Nasdaq at 6700 in the S&P 500 at 2600, which brings us to the conversation of today and that is—is this thing going to crash?
I wish I had a little crystal ball here and I could look out into the future, but sad to say, I’m maybe not a very good barometer. I’ve been thinking this thing was going to crash for the last two maybe even three years. It’s been really hard to get money active in the stock market because everything’s been so overvalued. And unfortunately, reminds me of the late 90s when I went through all this with the internet stocks and how fun that was. I had to watch portfolios just go crazy and then decimated within no time at all.
Just used to be so easy. You really thought you were smart too that you, “Oh I bought this stock or I bought this stock back in the 90s,” when basically anything you bought went up and went crazy. I happened to be on vacation one day. Well, for about a week and I would wake up in the morning and trade a few stocks. And there were days where I was making 10, 20, $30,000 in a day while I’m on vacation. And thinking, “Holy smoke! If this thing keeps going, this is going to be a great life.” And everybody thought it was going to keep going.
Keep in mind that the market has a way of proving the most number of people wrong. And so, as you see more and more people get comfort out of this market, maybe less worry, maybe even putting more money in, you can almost rest assured that that’s probably coming to its tipping point.
So speaking of tipping point, that’s kind of what I want to talk about today, what are some things that you can look at to get at least an assessment of where the market is now and what that might mean in the near future. And I don’t look at a ton of indicators. I’m not a guy who just studies and analyzes everything that happens in the market but there are a few indicators that I’ve watched for decades now that are always to me worth watching because they give us some hint as to at least where we are and some hint to where we may be going.
The first one I want to talk about, and by the way, if you’re watching us on this on video, I’ll be able to show the graphs. If this is a podcast, I’ll describe them or if you’re listening to us on a podcast, I’ll describe in the best I can. But I also want to put them in our show notes so just go to wisemoneytools.com/24 and that will get you to this podcast and then you can see the show notes and these graphs and charts. And really, we are going to talk about a couple of them. Most of them you can probably just imagine in your mind. But for those of you who are watching us on video, I’ll pop them up there.
Well, the first one that I want to talk to you about is called the Shiller PE. For those of you who don’t know what PE stands for, that means Price Earnings Ratio. And essentially, what they do is just it’s the price and the earnings divided so that they get some sort of a ratio, the price of the stock versus the earnings of the stock is what it boils down to. And PE Ratios are used commonly in fundamental analysis. This is when people are trying to figure out if a stock is worth buying at its current price or if it should be valued higher or lower.
So the Shiller PE is unique in the way it does things and basically, here’s a couple of numbers to be aware of. So the median, meaning the average. But the median Shiller PE price since like 1890 has been right around 16, 17, somewhere in there. Little higher in some decades, little lower in others, depending on what’s going on.
But if we go back to the Crash of 29. So 1929 where was that Shiller PE? Well, it was right at 30. So again, as a comparison, the median is about sixteen. So it’s about double the median and right at 30 when here comes the Crash of 29. And for years, it just took forever to make that money back. If we look then at, let’s see, the next time frame where things are just really bad, we went from about 1940 to almost 1960 where the markets just really didn’t do a whole lot. And finally Black Monday. I shouldn’t say finally but our next stop will be Black Monday.
For those of you who are a little bit older as 1987, October of 1987, when the stock market took the biggest one-day crash ever, I think it’s still one of the largest one-day drop in history. But then our Shiller PE was right at about 19. Okay. But, then it went crazy. And going back to our conversation about the internet boom, the Shiller PE before the internet bust got to an all-time high, historical, never has been hit again at about 44.
So when that internet just ballooned, ballooned, ballooned and ballooned and when that finally busted, the Shiller PE was at 44. So the only way that makes any sense is to see where we’re at today. So remember the Stock Market Crash of 29 at 30, the Black Monday Crash in 87, we were pushing about 19 and today, we set at almost 32. So we’re significantly almost double what it was in 87, we’re just about a little bit higher than the Crash of 29. And that just gives you a little perspective that from a price-earnings relationship, we are way, way overvalued.
And just if you could see this chart, those of you who are looking at it, you can see that we bounced against 20 and 25 regularly and then we drop back down to that median and then we bounce up to that 1825 again and then we drop back down, just normal ebb and flows and cycles of the market. So anytime we have a run where we’re getting up into the 30 range, we’ve been on quite a terror. And it’s been great. Don’t get me wrong. I think a lot of people have enjoyed this but the question is how many people will end up holding on to any significant gains if this market were to make a correction back to the median, back down to 16.
Basically, we need 40 to50% drop to get there. And what’s that going to look like to all these people over the last seven, eight, nine years that have done really well and have seen their portfolios grow, those that went through the crash of 2008 or at least back ahead and moving forward. But what would happen if this thing goes back down to the median? Okay. So that’s one indicator.
The other indicator is kind of interesting to me because it’s what’s commonly referred to as the Buffett Indicator and basically, it’s Warren Buffett’s favorite indicator or so they say. I haven’t talked to him personally so I don’t really know but yeah it is published that it’s one of his favorite indicators. And what it does is it takes the total value of the stock market, all the equities combined and then it divides it by the GDP, the Gross Domestic Products. So if you take the value of the entire stock market and divide it by the gross domestic product of the United States, you come up with this ratio.
And this ratio is supposed to give us some indication if we’re overvalued or undervalued. And so you can kind of see how this works. Again if I go back to, oh this one doesn’t even go back to the Crash of 29, but there are sometimes along the way that we can look at 87. This indicator was at 32. Okay. Excuse me, 87, 85, 86, sorry it was at 60. So right at 87, when the Crash of 87 took place, this indicator was at 60 and it’s 60%. Basically, GDP is 60% or the equities are… numerator, denominator.
Yes, so 60% is where it was in 87. If we go back to the crash of the internet boom, the internet bust, I should say, we were at 151%. So quite a bit higher than the 87 crash. And today, we’re at 133% back at the crash or in 2010 when we started moving up, the indicator dropped all the way down to 58. So what happened is from 151 at the internet peak, it had kind of worked its way all the way down to 58 before it started moving up again to today’s value of 133.
Now, what does that mean? Okay, again, so perspective. What this ratio supposed to mean is this—any time the ratio is below 50%, that means that stocks or equities are significantly undervalued. In other words, they’re probably a good buy. Everything is way undervalued and maybe a good time to get your feet wet. If the ratio is between 50% and 75%, it indicates that the market is mostly undervalued. Still, probably a good time to be getting involved. When the ratio is 75% to 90%, it’s considered fair value, which means, you may or you may not move very quickly from that position but it’s fairly valued and you should be okay. Alright?
When it’s from 90 to 115%, it’s considered modestly overvalued and that’s when you got to kind of hunt and find those stocks or those companies that may be undervalued. Anything over 115% is considered significantly overvalued. So here we are, basically right now at 139 and some change. So we are significantly overvalued.
This might be the reason why Warren Buffett is sitting with over a hundred billion dollars in cash as of August. And that that might tell you that he’s not too impressed and not putting money into this market because of its current valuations. And of course, he’s considered the value investor of all times. It’s probably not very accurate description because value investing means different things to different investors but he certainly knows how to buy into companies when they’re undervalued and that’s what he’s done his whole life and why he’s been probably deemed as the greatest investor ever.
So he sees this market as significantly overvalued. Shiller PE puts it at one of the highest points in history in terms of when other markets took significant corrections. So again, we don’t have a crystal ball and certainly not trying to tell you what you should be doing but at least maybe give you an indication and a sense of where we’re at so that you can make some good sound financial decisions as to where you think your money should be and if it’s time to maybe take a little bit off the table or maybe you just feel lucky and you want to get more money involved. Who knows? But it’s just good to have a good idea and a sense of where things are.
Well, that’s about it for this podcast on our market analytics and I hope it was worthwhile. And again if you’d want to see these charts and graphs, either watch this on video or jump on to our website and go to our podcast, podcast 24 and there you’ll see the charts and graphs.
As always, if you have any questions, shoot them two firstname.lastname@example.org. I’ll answer them just as quickly as we can. And in the meantime, if you ever want to just have a moment where you can have a strategy session, you can also request that too at the same email, email@example.com. And we’re going to have a quick little strategy session just to see how you’re doing or how is it working and some of the ideas and strategies that we work with that have been very helpful and fruitful for many, many of our clients across the country.
In the meantime, I hope you just have a great holiday season. I know we’re going to catch up another couple times before Christmas but it’s always good to have a few days during Christmas where you can reflect and think and maybe help someone else out along the way and give off yourself this time of year. And then prepare both financially, mentally, physically, spiritually for 2018 and what that might bring to you and your family.
So glad to have you here on our podcast and look forward to talking to you next week. Hope you had a great Wealthy and Wise Wednesday and a great rest of the week. Until next week. Take care.
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