The Stock Market Is Not Overvalued, And A Bear Market Is Nowhere Close

New York (Aug 21)  The value of something is determined by the price a buyer is willing to pay for it, regardless of what others may think. So whatever price the stock market is trading at, that is its fair value.

When someone says the market is over-valued, what they are really saying is that the market will be valued less in the future.  In-other-words, they are making a prediction. How many pundits have said that the market was over-valued during the last ten years? Most of them have, at some point, and all of them were wrong; the market is more valuable now than at any other time in the last decade.

When we speak of the future, we can only refer to "possibilities and probabilities". And the only way to get a handle on the latter, is to look at historical patterns. The only point at which a market is truly over-valued is just before it turns into a bear market. In this piece, we will argue that, from a fundamental perspective of past expansionary periods (bull markets), the balance of probabilities is that we are not yet close to the start of a bear market and, therefore, the market is not yet over-valued.

Corporate Debt

Corporate long-term debt, not due for more than one year (blue line), has been decreasing over the last 3-quarters, and debt that is due within one year (red line), has been holding steady for several years.

Real Personal Consumption Expenditures

The chart below, shows how Real Personal Consumption Expenditures have dropped ahead of every recession since 1949, except for one (1961). PCE is rising, which corresponds with economic expansion, not contraction.

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