Currently, the U.S. stock market appears to be quite overvalued. As it continues to reach new nominal heights, its valuations are soaring. But how can investors assess this situation accurately?
Fortunately, several key metrics can provide clarity. One such metric is the Shiller’s Cyclically Adjusted Price Earnings (CAPE) ratio, which is currently at 27.5. This figure is 65 percent above the CAPE’s historical average.
Notably, only twice in the past century has the CAPE reached levels higher than the current one: once during the late 1920s, prior to the stock market crash, and again in the late 1990s, just before the burst of the internet bubble.
The Buffett indicator, which compares total market capitalization to gross domestic product, also indicates significant overvaluation in stocks. Currently, this ratio stands at about 125 percent, whereas a rationally valued market typically has a ratio between 75 and 90 percent. Anything above 115 percent is clearly overvalued.
It goes without saying that the most reliable investment strategy is to buy low and sell high. On the flip side, purchasing at high prices and selling at low prices guarantees a loss. Given the current valuations, acquiring U.S. stocks now equates to buying high.
Overvalued and Aging
While it’s possible to buy high and hope to sell even higher, such an approach is not advisable as a serious investment strategy—unless one equates investing to gambling.
Successful long-term investing entails targeting stock markets offering favorable valuations. It also requires identifying developing economies that can elevate stock prices over decades. These are the regions where investors can tap into burgeoning wealth and secure their financial futures.
Unfortunately, the U.S. stock market—along with many other Western markets and Japan—is characterized by overvaluation and is being artificially inflated by central bank monetary policies. Moreover, the demographics of these markets are largely comprised of aging populations that have experienced their peak growth years.
Here at Economic Prism, we appreciate the wisdom of the elderly, even the cantankerous ones. They offer insights and experiences; however, it’s a reality that their most productive years are behind them. Consider our neighbor Joe, a retired high school teacher in Los Angeles who dedicated 30 years to education. While he contributes to the community in many ways, he does not contribute to economic expansion.
How to Capitalize on Economic Opportunities
The crux of the matter is that population age demographics in developed nations are skewing older. Individuals like Joe are increasing in numbers while the workforce shrinks. Consequently, resources are increasingly diverted from investment and savings to support the aging population, leading to a stagnating or shrinking economy.
For instance, the median age in Japan is 44, while in most of Europe it is around or slightly above 40. Australia has a median age of 37, the U.S. sits at 36, and China is at 35. In stark contrast, Central Africa has a median age of under 25, and in South Africa and North Africa, it ranges from 25 to 30.
The countries that are politically stable and boast youthful, growing populations seem to be India, with a median age of 25, and Brazil, with a median age of 30. Given current demographic trends and economic forecasts, it’s likely that the economies of Japan, Europe, Australia, the U.S., and China will witness stagnation in the coming decades—many are already experiencing this. In contrast, India and Brazil are set for growth.
As of February 27, the most recent data shows that the CAPE for the Indian stock market is at 21.7, while Brazil’s CAPE is remarkably low at 8.8. Additionally, on March 5, the Buffett indicator for India was at 78 percent, whereas Brazil’s stood at only 39 percent.
What conclusions can we draw?
India, as a youthful economy, shows potential. Its stocks are not cheap, but they also do not fall into the expensive category. Conversely, Brazil, while slightly older, offers exceptionally low stock prices.
So, how should one proceed?
A balanced strategy could involve allocating a modest yet equal portion of your investment portfolio to broad market ETFs from each of these countries and allowing this investment to mature over the next 15 to 20 years. This approach allows you to benefit from the intertwined trends of youthful economies and attractive stock valuations. Consider looking into the iShares MSCI India ETF (NYSE: INDA) and the iShares MSCI Brazil Capped ETF (NYSE: EWZ) as potential investments.
If you’re interested in learning about unique and profitable investment opportunities like this, I invite you to explore the valuable Urgent Strategy Report titled Wealth Capture Report: How to Dip into Wealth Flows and Generate Personal Abundance. Discover more and claim your free copy here.
Sincerely,
MN Gordon
for Economic Prism
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