I know that market valuation levels are almost totally useless for indicating which way markets will move next. A usefully good guide for likely 5-15 year planning, but not a month or a year.

That being said, am I the only one getting just a little creeped out by the 1999 flavour the the exuberance on display? If it were a machine, I think I would detect a small high pitched whine and the faintest smell of burning oil.

Jim

PS, fun with data

For some sense of valuation, a common approach (still useless for timing) is the CAPE family of studies. i.e., compare the current smoothed earnings yield to the history of that since some date in the past. The first problem is that the answer you get depends hugely on what start date you pick: markets have been getting steadily more expensive on trend for over a century. To simplify that decision, I noted that you get a fairly tight range of "historical average" if your start date is anywhere in the range from Feb 1991 (34.4 years ago) to November 2009 (15.6 years ago), always with end date now. So, on the dubious assumption that a reasonable amount of history to define "normal" valuation is between 15 and 34 years, here goes:

For any start date in that range, the "average since then" smoothed earnings yield (using my smoothing) comes out in the range 3.945% to 4.177%. Today's figure calculated the same way with the S&P at 6276 is 2.795%. So we definitely don't know what the market will do next, and we definitely don't know what the average valuation level will be in future, but we can say with some confidence that the S&P 500 is 41.2% - 49.4% more expensive than usual based on cyclically adjusted earnings yield. And that it would have to fall by -29.2% to -33.1% to get down into the range of the average valuation since back then. That size of fall would put the S&P index into the range 4200 - 4446 today, rising slowly over time with inflation and the general growth of earnings.

None of that is a market forecast, but you could say that IF valuation levels were to return to old norms any time in the next many years, THEN returns from here until that time will be poor.

I doubt we are at a market top today or imminently, at things are just too exuberant. Today started with another gap up. But I imagine that the exuberance will fade--maybe later this year??--and there will be some excellent opportunities to sell anything you own which might be a bit overpriced. Perhaps withdraw from US equities, then sit on cash and read books for a while waiting for a great time to re-enter.

One of my favourite trite quotes: you make most of your money in bear markets, you just don't realize it at the time.

J