Mark Hulbert: The fundamentals of the stock market have improved markedly, but few investors have noticed


You’ll know that the bear market in stocks is nearing an end when investors remind anyone who’ll listen that equities are fairly or even undervalued.

We’re not there yet.

When bull market sentiment is predominant, investors tend to focus on short-term technical factors such as momentum, trend following and chart patterns. Only near the end of bear markets do they begin to focus on long-term fundamentals.

And right now, these short-term factors are dominating investors’ thoughts. In fact, according to an analysis of search term frequency on Google Trends, interest in stock market valuation, if anything, may be lower today than in the past couple of years.

Read: Five reasons why energy stocks look like a buy despite rising 74% in a year

Consider the arguments advanced by a recent MarketWatch column asserting that a new bull market has started. In “Evidence for a new bull market in stocks is rapidly piling up,” the author mentioned only technical indicators as a reason to believe a new bull market has started, and not once discussed valuations. He used a combination of indexes, including the S&P 500 SPX, -3.37% and Nasdaq COMP, -3.94%, in his argument.

That’s puzzling. As I outlined in my last monthly review of stock market valuation indicators, the market’s fundamentals have improved significantly since the beginning of the year. At the June lows, the stock market was projected not only to handily beat bonds over the next decade but also to keep up with inflation.

Just “keeping up with inflation” may not be enough to excite investors. But, given that inflation currently is the highest it’s been in more than four decades, you’d think that long-term bulls would find in this improvement something to celebrate. No other major asset class is slated to keep up with inflation over the next decade.

But, on the whole, few appear to be noticing.

This will change when the technical indicators become so awful that investors give up hoping for a near-term rally and throw in the towel. The only thing investors will be able to hang their hat on at that point will be the historical truth that, eventually, the market responds to fundamentals. In this sense, a widespread focus on valuation is evidence of capitulation, the surrender that accompanies end-of-bear-market despair.

Therefore, it behooves us to focus not only on what the valuation indicators themselves are saying, but also whether the investment public is even paying attention.

Valuation indicators don’t yet support a new bull market

In the meantime, the table below shows how each of my eight valuation indicators stacks up against its historical range. As you can see from the column comparing current valuations to those prevailing at the end of last year, today’s market valuations are significantly more attractive than in January.

  Latest Month ago Beginning of year Percentile since 2000 (100 most bearish) Percentile since 1970 (100 most bearish) Percentile since 1950 (100 most bearish)
P/E ratio 21.76 21.41 24.23 48% 67% 76%
CAPE ratio 31.63 28.90 38.66 87% 88% 91%
P/dividend ratio 1.59% 1.72% 1.30% 85% 88% 91%
P/sales ratio 2.60 2.56 3.15 92% 92% 92%
P/book ratio 4.18 4.11 4.85 95% 91% 91%
Q ratio 1.81 1.78 2.10 92% 96% 97%
Buffett ratio (Market cap/GDP ) 1.72 1.69 2.03 93% 97% 97%
Average household equity allocation 49.7% 49.7% 51.7% 95% 96% 97%

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at

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