Is the U.S. Stock Market Overvalued?

Its been an unbelievable bull market over the last few years, with this calendar year being nothing short of breathtaking.

This week, U.S. stocks have continued their upward climb, ending higher for the third straight week. Both the Dow (up 15.37% YTD), and the S&P 500 (up 14.55% YTD) closed at record highs.

First question is how long will this go on for, and one which I addressed in my article "The world is awash with money and government debt - what will happen?". The answer being, until the Fed stops its massive stimulus bond buying program thats pumping trillions into the economy. This is keeping yields at record low rates. Interestingly, Bill Gross of Pimco, said via Twitter last night in reference to the bond market that "the secular 30-year market likely ended 4/29/2013."

But is the stock market overvalued? One valuation method is a tool popularized by Yale University economist and professor Robert Shiller. Using this valuation method, the Shiller cyclically adjusted P/E ratio for the S&P 500 SPX is now 23.2, vs. the pre-bubble average of about 15. It’s only been higher on only three occasions in the past 93 years - before the 1929 crash, before the 2000 crash, and before the 2008 crash. Shiller was also one of the few respected economists that warned of a severe U.S. housing market crash.

Personally I think the stock market is overvalued. It's being driven by massive amounts of money looking for yields.

If the economic and political chatter is turned off, you can't help but feel that things should be better. The economy is flatline at best. Unemployment (including those that have "given up") is high; job creation is not keeping pace with population growth; infrastructural  and consumer spending is low, and all this is set against a backdrop of spectacularly cheap money. Things should be a lot better and they're not - yet the market is at record highs.

And for the sake of interest, great crashes have occurred in 1637, 1797, 1819, 1837, 1857, 1884, 1901, 1907, 1929, 1937, 1974, 1987, 1997, 2000 and 2008.

By Mark Crosling