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In my last post I wrote about the technical reasons to take a tentative stance in the stock market right now. Here are a few charts that make the fundamental case for caution.

1) The Shiller 10-Year P/E Ratio is back to a level only seen during past peaks (1929, 1966, 1995-2002). The green line represents one standard deviation above the long-term average 10-year price-to-earnings ratio of the S&P 500. In plain English, stocks should rarely be valued this high based on their earnings.


2) Relative to GDP the stock market is even more greatly overvalued. The following chart displays one of Warren Buffett's favorite general valuation metrics: total stock market capitalization as a percentage of gross domestic product. It clearly sends an even more dramatic message than the first.


3) The “Q Ratio” represents the value of the stock market relative to the replacement value of all of the underlying companies' assets. The current reading here looks very similar to the first chart I presented; stocks are currently breathing rarefied valuation air.


To boil it down, relative to earnings, revenues or assets, stocks are currently priced at levels that have proved to be, at best, unattractive, and, at worst, ruinous to investor portfolios in the past. This is a key macro point that guides my micro-investment decision-making.

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