The chart below can be downloaded here.
According to at least one measure, U.S. stocks are now more expensive than at any point in at least 88 years, including the dot-com bubble. How can that be? Well, the dot-com bubble was concentrated in a relatively small group of stocks, namely technology and telecom companies, whereas overvaluation today is more broad-based.
While using valuation as a short-term timing tool typically isn’t productive, that does not mean it is not important or useful. In fact, valuations have a very strong relationship with subsequent longer-term returns.
Think of periods of excessively high and rising valuations like snow gradually falling on a steep mountain slope. While it is impossible to predict when something bad will occur, it is absolutely worth paying attention to. The higher valuations get, the less stable the “snowpack” becomes & the greater the odds of a poor outcome.
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