Does an Overvalued Stock Market Mean a Crash Is Coming?

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There is one issue that has come up for quite some time, now that the bull market is seven years old and since the Dow Jones Industrial Average (DJIA) and the S&P 500 recently hit all-time highs. Is the stock market really overvalued? The simple answer is yes. A more rational answer is that the market valuations of 2016 are higher for a whole host of reasons, compared to past bull markets. Note that valuations actually went far higher in the past. Perhaps the real question is whether the market and all the other indicators might imply a market crash or a serious correction is coming up?

24/7 Wall St. wanted to give investors and economic watchers a quick-hit cheat sheet on where things are on the markets. This is a simplified and general view that is admittedly U.S.-centric. International markets matter handily here, but the reality is that there are some basic statistics to consider outside of China and other issues. The DJIA is still less than 300 points from its all-time high! And the S&P 500 is valued at 17.8 times forward earnings.

Again, the market is not cheap. It is also nowhere close to historic highs that might bring panic levels. It is quite possible that the market is just in a new no man’s land where valuations might not matter, within reason. Oil has moved within an acceptable trading range, and gold remains strong. All of this seems to be fueled by low U.S. rates and negative rates in Japan and Europe driving investors into a yield chase.

None of this means that a market crash is on the way. Still, anything can happen, and a market correction often surfaces due to a whole host of reasons. That would even include something not yet on the radar.

24/7 Wall St. wanted to address the valuation metrics behind stocks, what the market volatility trends look like, interest rates abroad and at home, oil and gold, and even sentiment. Also considered were issues around payrolls and unemployment, GDP growth expectations for gross domestic product (GDP) and investing guru views.

Dividend Bubble?: Utilities and defensive stocks have seen their dividend yields driven down as more traditional income investors have moved their way in the past five years. Vanguard recently closed its $31 billion dividend growth fund because it needed to preserve the integrity of the model. Translation: valuations have reached a point they feel may hurt performance ahead … someday, but maybe not today.

S&P Earnings Valuations: S&P said that the S&P 500 earnings per share (EPS) growth, excluding energy, would be up 2.8% in the second quarter. Aggregate second-quarter S&P 500 earnings are estimated at $29.05 per share by S&P itself, which would be an earnings decline of “only” 2.5% from a year ago, versus the drop of 5.2% that was expected at the start of earnings season.

DJIA Stocks: 21 of the 30 DJIA stocks outyield the 30-year Treasury. The Dow is breaking multi-day down days, but it wasn’t really more than 300 points down from the all-time high.

Volatility: The VIX is down yet again at 12.26. Instead of being called the panic index, maybe this is the complacency index. This means it is now dirt cheap, in theory, to buy put options to protect against a crash or pullback.