January 3, 2024
By Steve Blumenthal
“It is more important to know what will happen than when it will happen, because it is impossible to forecast with precision the timing of critical events.”
– Arthur Zeikel, former Chairman of Merrill Lynch Asset Management and co-author of the book How to Invest Wisely
The clock has turned, and a new year begins. Let’s go get it! Head up, big heart, lights on—it’s going to be a great one.
At least once a quarter, I take a deep dive into the stock market’s valuation metrics. Why? To better understand where we currently stand and consider future investment positioning.
Wash, rinse, repeat. It’s not glamorous, but it’s vital. I did the review today, and I’m sharing a few insights with you below. Spoiler: the conclusions haven’t changed—valuations still matter!
Think of today’s On My Radar as a “chart pack.” It’s a curated set of what I consider the most essential valuation metrics for understanding both the risks (where we are now) and the opportunities (where we’d like to be).
As we dive into 2025, there are a few key technical indicators worth watching closely:
- The 10-year Treasury Yield: Its direction will shape broader market trends.
- Dollar/Yen Exchange Rate: A rising Yen typically signals bearish global liquidity conditions.
- The Yield Curve: It just turned positive for the first time in 30 months—historically, a recession-level trigger.
- High Yield Bonds: The proverbial canary in the coal mine for credit markets.
There’s plenty more to monitor, but let’s stay high-level for now. What we’ll consider are the equity market and fixed-income markets in general. I don’t want to blur the conclusion; markets are extremely overvalued and offer little return opportunity over the coming years. You’ll see that in the data, and it may cause a bit of depression. Don’t view it that way. An opportunity could present quickly. The idea is to know what it looks like and plan when to take action.
Value: The price you pay for something should matter. If gas prices increase, your money doesn’t buy as much. When it goes down, you get more value for your money. Same with food, housing, rent, and investments. If you buy a low-yielding bond, you will not earn as much compared to a higher-yielding bond. What we are discussing today is the value of the U.S. stock market. This does not mean there aren’t other areas to invest in that offer better value; I am not bearish. I’m not sure I’ve had better investment opportunities on my plate. I am only bearish on overpriced assets. And, since that is where most investors are invested in their retirement plans and 401ks, I’m ringing the warning bell. Valuations will get good again, and it is relatively simple to see what they may look like when they do.
Grab your coffee and settle into your favorite chair. You’ll find valuation targets in several of the charts that follow and also a summary of critical indicators to keep on your radar as the year progresses: The 10-year Treasury Yield MACD trend indicator, Treasury Yield Spreads, the Dollar vs. Yen (regarding global liquidity), the HY Junk Bond Market, and the S&P 500 Weekly MACD trend indicator.
On My Radar:
- Valuation Chart Pack
- Key Charts to Watch
- Trade Signals: January 2, 2024 Update
- Personal Note: NYC, Florida, Utah
See Important Disclosures at the bottom of this page. Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.
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Valuation Chart Pack
Valuations, by almost every measure, are at record highs. My favorite is what is now known as the Buffett Indicator. Let’s start there:
The Buffett Indicator
The Buffett Indicator compares the total market value of all publicly traded stocks to the country’s GDP. For the U.S., it divides the Wilshire 5000 Total Market Index by GDP. The following, courtesy of Ned Davis Research, uses NDR’s estimated value of 4300 U.S. Common stocks (their shares time their 12-31-24 closing market price) and compares as a percentage of Gross Domestic Product or GDP.
Key aspects:
- Reading above 140% suggests overvaluation
- Reading below 80% suggests undervaluation
- The historical average is around 100%
Warren Buffett called it “probably the best single measure of where valuations stand at any given moment.”
The left-hand chart is from November 2023. The right-hand chart is from 12-31-24. It was high a year ago. The December month-end reading was 196.9%. Second, only to the all-time high on 12-31-21 that was likely fueled by the post-COVID-19 rescue money.
Bottom line: This is what extreme overvaluation looks like. I contend we are past Euphoria.
Source: NDR
Median PE
My favorite valuation metric is NDR’s Median PE. Think of the median PE of the stock in the middle of the data set. If there are 500 stocks in the S&P 500 Index, rank them all from highest PE to lowest PE, and the Median is the PE of the stock in the 250th position.
Next, look to the bottom section. Based on the S&P 500 index 12-31-24 market close at 5,881.63, a market decline of 31.5% gets us to the 60.8-year Median Fair Value. Simply, the Median Fair Value is a PE of 17.8 (green dotted line center of chart).
I like how this data helps us set valuation targets. If I was sitting on a lot of cash to invest, this data gives me a sense of when I might consider buying the S&P 500 Index or buying into the stock market in general. The green “We’d be better here” arrow in the lower section reflects the current level. If we have a bear market in 2025, there is a reasonable enough probability we may reach the 4,028.92 level. A market crash would take us down below that level.
Should that occur, I’ll write a price titled, It’s So Bad It’s Good. That’s a safe prediction I’m willing to make. Writing the piece, I mean. I have know idea, nor does anyone else, what will happen. I want to be mentally prepared, knowing that panic creates the best opportunity.
Source: NDR
Stock Market Cap as a Percentage of Gross Domestic Income
What I like about this valuation process is how the data compares the value of the S&P 500 Index on 12-31-24 as a percentage of total U.S. Gross Domestic Income. NDR then plots subsequent 1-, 3-, 5-, 7-, 9-, and 11-year returns. I’ve highlighted in yellow the returns when the reading was in the Top Quintile of highest valuations. You can see that the market was lower in each period. I’m sure there were exceptions with some performance being better and some being worse than what is reflected. NDR is calculating the average change in the S&P 500. Also, note that the numbers are not annualized return numbers. For example, 11 years later -2.37% means that $100,000 declined to $970,630 11 years later (on average).
Think about this way of viewing valuation from an odds perspective. Wait for a reversion back to the uptrending dotted trend line in the middle section, or better yet, let’s hope we get a “We’d be better here” opportunity. But you’ll need to have an iron belly as panic will have filled the air—a buy when everyone else is selling moment.
Source: NDR
Hussman Strategic Advisors 12-year Return Forecast
Shared this one with you last week. It’s important, so I’m adding it to our watch list.
Source: HussmanFunds
The above translates into the following…
Hussman’s 12-year Annualized Return Forecast equals -6% Per year for 12 years (yikes):
Source: HussmanFunds
There are many others, like price to sales and price to book, but they all tell the same story. We discussed the high concentration of investors in just the top ten names over the last number of months, and I covered it again last week. The bottom line is that the party can go on for longer, and it may. But it may not. Don’t get interested in the general stock market until we find ourselves left of the vertical 1.00 line in the above chart.
Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. Current viewpoints are subject to change.
Key Charts to Watch
The 10-year Treasury Yield MACD trend indicator
The red arrow in the MACD section (bottom) signals the current interest rate trend is up.
Source: Stockcharts.com
6-Month to 10-month Treasury Yield Spread – Recession Watch
Recession tend to follow the normalizing of the yield curve. After a period of time when short-term yields are higher than long-term yields, this chart shows (red arrows) that recession tends to follow after the spread difference moves back above the dotted center line. That happened briefly in late December and again today, January 3, 2025. This is about as clear a recession warning as you’ll find. Lights on!
Source: NDR
The Dollar vs. Yen (regarding global liquidity)
Green arrows = Yen is declining vs the dollar (currently bullish for global liquidity)
Source: Stockcharts.com
The HY Junk Bond Market and Small Cap Stocks
Signal box in the bottom section. Currently, a bearish signal for the HY Bond Market and the current trend in small-cap stocks.
Source: NDR
The S&P 500 Weekly MACD trend indicator.
The current MACD trend signal is bearish—red arrow in the lower right-hand section.
Source: Stockcharts.com
Just a few more interesting data points to share…
From @KobeissiLetter
Heading into 2025, there are now 100 TIMES more assets in leveraged long funds than leveraged short funds. Over the last 8 weeks, this ratio has DOUBLED, exceeding the record high set in December 2021. Is the bull trade too crowded?
Source: @KobeissiLetter
Record concentration in US Stock
Source: @jpmorgan, @MebFaber
Office Delinquency Rates Spiking Higher – Great Short Part II (???)
Source: @ttmygh, Trepp, Wolfstreet.com
The Big Elephant In The Room – DEBT
Source: @chamath, @BearTrapsReport
Please note that the information provided is not recommended for buying or selling any security and is provided for discussion purposes only. Current viewpoints are subject to change.
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Personal Note: NYC, Florida, Utah
“Don’t count the days, make the days count.”
– Muhammad Ali
2025: A Fresh Start
After a quiet New Year’s celebration at home with my Susan—watching football and enjoying some downtime—I found myself reflecting on the year gone by and the one ahead. Perhaps you’ve done the same. I’ve found a good routine with an impact fitness exercise class, so there was no need to put that on the list. I envoy my friend Chuck, who is doing his best to hit all things on his bucket list, and he does it with his family and friends. Maybe a little more Chuck and a little less grind in 2025. But really, no complaints, as you can see by what I have lined up in January.
It’s easy to get caught up in the rhythm of work, work, work—it’s important, of course—but equally vital is carving out time to be present and find joy in the day-to-day, no matter how ordinary. Something I can improve upon. Reflecting on 2024, the memories feel like a whirlwind, a tangled jumble of moments. Perhaps more meditation, a lot more. I ran across this on X yesterday. A neuroscientist analyzed 18,000 brain scans, and what he discovered is promising. He proposes that our thoughts can change our biology. Fingers crossed, I hope this is real news. Click on the image.
Source: @theodoricchew via X
In any event, it is a great reminder to slow down, take life one day at a time, and find balance. The finish line will always be there, but oh, the journey along the way. It’s worth savoring.
As we enter 2025, turbulence in economics and geopolitics lies ahead—that much is clear. But also are discoveries, advances in medicine, and genomics and technology. I just learned you can have a deep conversation with ClaudeAI. Talk about advanced learning. Check it out. And perhaps most important of all, let’s share joy, kindness, and humility with our friends and family and new friends we meet along the way. These small acts may matter even more this year.
Whatever challenges come our way, we’ll face them together. Thank you for spending time with me each week and being my friend. Have an outstanding year. Let’s “make the days count.” Ever forward we go!
I’m heading to Florida next Tuesday through Thursday for two business dinners and, yes, some golf. In mid-January, I have a dinner in NYC to honor a friend, and then I’m flying to Snowbird to ski with Mike M., my son Matthew, and Jack G. for a few days. 2025 is off to a good start, and I hope yours is as well.
With kind regards,
Steve
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Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.
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