Is The Stock Market Overvalued?

It’s common for clients and prospective clients to ask if the stock market is overvalued, or if it's too late to invest in the market.

There are many complex ways to answer this question, but let’s just focus on a few basic numbers without over complicating things.

Also, to keep this very simple, lets focus on the S&P 500 index, which is the most commonly tracked equity index. The S&P 500 index is comprised of the 500 largest U.S. publicly traded companies.

You can begin to answer this question for yourself by looking at some charts...

Below is a chart showing the performance of the S&P 500 since 1972 to present, so over a 48 year time period.

 Over this time-frame, the S&P 500 averaged 10.39%. Very close to the 100 year historical average of about 10%.

Next, let’s look at a chart from 2000 - 2020.

During this time-frame of 20 years, the S&P 500 averaged 5.94%, about 40% lower than the 48 and 100 year average of about 10%.

Lastly, here is a chart from the last 5 years.

Over this period, the S&P 500 averaged 11.87%, about 18.7% higher than the 48 and 100 year averages.

What I think is the most interesting is the 20 year average between 2000 - 2020, and how much lower the average is during this time period is vs. the 48 and 100 year average.

From purely a performance perspective, one could argue that the market is quite undervalued looking at the last 20 years.

Over the last 5 years, the market is a bit overvalued.

Over the last 48 years, the market is fairly valued.

Here is the takeaway…

The market could be both overvalued and undervalued, it just depends on the time-frame you are looking at.

If your time-frame for investing is short-term, it might be better to find an investment opportunity with less volatility like short term treasuries.

If your time-frame for investing is longer, it’s best to invest in the stock market, even though it’s at record highs.

Summary: 

The market might be overvalued in the short-term, however, when we look at the 20 year average compared to the 48 and 100 year averages, the market could potentially be significantly undervalued.

About the Author

Trent Grzegorczyk is the founder and principal of MICAPITAL, a registered investment advisor. Trent works with business owners, entrepreneurs, professionals, and high-net-worth individuals. Over the past 9 plus years, he and his colleagues have advised on over $3 billion in client assets. Trent enjoys cross country cycling, traveling, hiking, and resides in Traverse City, Michigan with his wife Alayna.

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