This faith and finance podcast is underwritten in part by Soundmind Investing. For more than 30 years, do it yourself investors have relied on SMI for proven strategies and trustworthy guidance. SMI helps people build wealth so they can provide for their families, prepare for the future and give generously. Learn more at soundmindinvesting.org. Are stocks overvalued right now?
No doubt some are. Better question, is the stock market as a whole overvalued? Hi, I'm Rob West. If you own stocks and the market is a bit overpriced, you probably don't really mind. But if it's wildly overpriced, what does that tell us about the market's prospects in the future? I'll talk to Mark Biller about that today and then it's on to your calls at 800-525-7000.
That's 800-525-7000. This is faith and finance, biblical wisdom for your financial decisions. Well, our good friend Mark Biller is executive editor at Soundmind Investing where they burn the midnight oil studying things like market valuation. Mark, welcome back. Thanks, Rob. Sounds really exciting. Yeah, super exciting.
I bet you're a lot of fun on the weekends. So Mark, you've got an article in the latest SMI newsletter titled Measuring the Markets Valuation and we'll of course put a link to it in today's show notes. But help us understand what you mean by market valuation and why it's important.
Yeah, great question, Rob. So to understand how the stock market can be overvalued or undervalued, we've got to first understand what stocks actually are. So when you own a share of stock, you have a tiny claim on the results of that business, the amount of the profit that that company earns. Now hopefully the company is going to grow and earn greater profits over time, which will make your ownership interest, your share of stock more valuable over time. In contrast to something like gold, which we discussed last month, financial people will talk about how stocks can grow your purchasing power over time. And what they mean by that is if you own the right stocks and those companies perform well, your ownership interest will get more valuable over time and can increase in value at a rate faster than inflation. Okay, that's all the backstory. Once we establish that a share of stock is really a claim on a sliver of a company's earnings, then we can go about figuring out if the price that we're paying today for that slice of company earnings is a high price or a low price.
Yeah, that's a really helpful setup. It's important to recognize that the price investors are willing to pay for company's earnings changes over time, right? Yeah, absolutely. So the price that investors will pay for a given dollar of company earnings actually changes pretty dramatically over time. And the reason that it changes so much is largely because investors as a group go through big emotional swings. So there are some times when investors will pay a lot for a little bit of earnings, other times when they demand really big bargains, and they're going to pay very little. So you know, listeners may never have thought about it this way before, but this change in investor attitudes is a big factor that drives big bull markets and occasionally stock market bubbles. That happens largely when investors are optimistic about the future, and they're willing to pay high prices for these company earnings. But it's also a factor in bear markets when stock prices fall. You know, usually bear markets do have some other catalysts like an economic recession, something like that. But investors also tend to swing from optimism to pessimism during these periods.
And that can cause the amount that they're willing to pay for that same dollar of earnings to plummet. Yeah, that's really helpful. So it sounds like the key to measuring how expensive a given company or the stock market as a whole is to know how much it's earning.
Is that right? Yeah, absolutely. And you know, not surprisingly, there are a number of different ways to measure a company's or the the broad markets valuation. But a couple of the most common ones do exactly that exactly what you're saying they compare a company's price to its earnings. Listeners may have heard of the PE ratio, that's the price to earnings ratio. And you can also take that same measure of the whole market to get a gauge of how the whole market's price compares to its valuation in the past.
That's really helpful. We're joined today by Mark Biller, executive editor at sound mind investing. We're measuring the markets valuation when we come back some of the warning signs related to market valuations. And what do the ratios say right now about the markets valuation and what does that say about where the market might be headed?
Back with much more with Mark Biller today. By the way, you can read this article at soundmindinvesting.org. This is faith and finance.
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I'm Rob West joining me today, my good friend Mark Biller. He's executive editor at sound mind investing and we're talking about an article in the most recent sound mind investing newsletter entitled measuring the markets valuation, understanding how we can evaluate both companies as well as the stock market as a whole in light of valuation. Is it too expensive or not expensive enough? Well, we're talking about that with Mark Biller today and Mark, I'm dying to ask for the punch line what the ratios are saying about markets right now, but I'm going to restrain myself for a moment. We'll get to it because you offer some important warnings about market valuation in your article.
So why don't you share those with us? Yeah, I'm glad you mentioned that Rob, because it is really important to understand what these valuation measures are good for and what they're not good for. So first and foremost, market valuation is not a helpful short term timing tool. Remember we're comparing the markets current valuation to its valuation at other points in the past. So we do that by looking back through market history and we can see say a period like the end of the dot com bubble in the late nineties and we can clearly see stocks were really expensive at that point. Or we might look at the other end of the spectrum, say the prices right after the great financial crisis in 2008 and we can see that stocks were really cheap there.
And so by doing that over time, we get an idea of where the extremes are. So in other words, most of the time valuations are in this certain range, but when they get this high, watch out or when they get this low, that's a real bargain. Now, the problem is the market sometimes will hit those levels that start screaming.
It's expensive or it's really cheap, but then they'll stay there for a long time. So one of the best examples of that that I remember in my career is in the late nineties. Chairman of the Fed, Alan Greenspan, gave a famous speech in 1996 where he said the stock market was irrationally exuberant.
And he was right. There was a big bubble forming, but that was 1996. The market continued to go way higher over the next three years. So you wouldn't have wanted to use that as a short term timing tool, even though he was right.
And eventually stocks did decline by 50%. So if we can't use market valuation as a short term timing tool, then what is it good for? Well, the main thing that market valuation helps us with is it gives us a better long range projection of what we can expect from the market going forward. So not surprisingly, there's been a ton of research about this, and that research typically shows that market valuation is predictive of future market returns, but only when you go out to like the seven to 12 year range. So what I mean by that, Rob, is if we're starting with very high market valuations, that tells us that returns over the following decade or so will tend to be below average and vice versa. If we're starting with very low valuations, we know over the next decade or so, returns are probably going to be pretty good.
Yeah, got it. So we shouldn't, of course, run out and make a bunch of trades based on this information. Mark, how can we use it to help us make decisions? Yeah, I think the biggest way is to let that inform your planning. So for example, if you know that market valuations are high today, and you know that historically that suggests that returns may be below average over the next decade or so, then you can use more conservative return estimates in any projections you're making about your retirement plans. So most advisors are going to use some sort of financial planning software that allows them to adjust those future return expectations. And that can help a person realize they may need to adjust their savings rate, they may need to adjust how long they plan to work before retiring. Lots of planning type decisions like that can be impacted.
All right, well, you've kept us in suspense long enough. So what do the various measures say about the market's valuation today? Well, unfortunately, the news isn't great. So most measures suggest that the market is pretty expensive today. And that really shouldn't be a huge surprise, because we had over a decade between the financial crisis bear market that ended in 2009, and the COVID shock in 2020. And we had this unusually long period with no recessions or bear markets to speak of.
We did, of course, have the the COVID shock in in March of 2020, where the stock market fell for all of a whole month before the Fed and the government sent it soaring higher again for another year and a half on all the stimulus we got. Now last year, of course, the market did get cheaper during last year's pullback. So the valuations today aren't quite as extreme as they were in late 2021. But they were pretty extreme in late 2021. And so by almost any measure, stocks are somewhere between pretty expensive and make your eyes bleed expensive today.
Oh, boy. Well, yeah, not the best news. So as we wrap up here, Mark, are there any other factors that can affect market valuations?
And how do these types of situations typically resolve? Yeah, so there are some other factors that do affect valuations. And one sort of hopeful point to make is that over the last few decades, the trend on all of these valuation metrics has been drifting higher. What I mean by that is what used to appear to be really expensive.
Now it looks more or less normal. So all of these are drifting upward. So maybe today's high valuations won't look quite as dramatic five to 10 years from now, if this upward drift continues. But generally speaking, when valuations get as high as they are today, investors realistically need to be thinking about their plan for weathering bear markets in the future, because that is most commonly how periods of really rich valuations get corrected. So if you think back to that dot com bubble example, in the late 90s, we used earlier, you know, the decade that followed included two separate bear markets that each cut the market really significantly, each of those went down by almost 50%. So the end result of all of that was we had really cheap valuations by 2009, when all that was over. And that set the table for this huge bull market that we've had since 2009. So the idea I'm trying to leave with everybody today, Rob, is there is a cyclical element to all of this, and it pays to be informed about that.
Not so you can run out and adjust all of your investments tomorrow. But so you can better plan for what may be in store over the next several years or a decade ahead. That's so helpful, Mark. It really takes this idea and puts it into a helpful context that informs us both today and well into the future.
Well, that's unfortunately all we have time for. We know a lot more about market valuation, though, and how it might affect our decisions. So thanks for sharing it all with us. Always my pleasure, Rob. That's Mark Biller, his executive editor at Sound Mind Investing.
You can read this article called Measuring the Markets Valuation at soundmindinvesting.org. That's soundmindinvesting.org. Back with your questions just around the corner at 800-525-7000. I'm Rob West and this is Faith and Finance. We'll be right back.
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For licensing information, please visit nmlsconsumeraccess.org. Welcome back to Faith and Finance. I'm Rob West. We've got some lines open today. 800-525-7000. Give us a call.
Let's head right back to the phones to Arkansas. Hi, Lisa. How can I help you?
Hello. I've heard you in the past talk about CKAs. Are these people professionals that are taking extra training or are they volunteers who are taking extra training? They are professionals. So basically in the financial services industry, there's a number of what are called industry designations where advisors who have an existing base of competency can get specialized training. So ones you may be familiar with, one of the more popular ones is CPA. That would be an industry designation, certified public accountant.
Another one that a lot of folks are familiar with in our space of the financial advice is what's called CFP, certified financial planner. CKA is just another industry designation, but it's the only one that's widely accepted across the industry for biblically wise professional financial advice. So it takes an advisor who's got at least 10 years of experience and has a pastor or client reference, and as long as they have another industry designation and pass a regulatory review and sign a statement of faith and take a 60-hour training course and pass a proctored exam and biblical advice, then they can add CKA, the designation. And it's really the way we help to connect the public to those professionals who can bring a biblical worldview of money management. But they're not employed by faith and finance.
They're, you know, in their own firms, large or small. They've just sought out the industry designation CKA and met the high standards. So what I would recommend, Lisa, if you're looking for an advisor who shares your values as a believer, is that you go to our website, faithfi.com, click find a CKA. You can put in your zip code, city or state, and then you set the search criteria, whether you want to look out 25 miles, 50, 100 or more, you'll get a listing of those that have CKA. There's more than 1400 in the US and Canada, and then you can interview them and decide on the one that's the best fit. Well, like I said, I heard you mention this in the past and had actually been online and looking for CKAs and, you know, the nearest one to me, but never really found anything. How do I choose someone who doesn't have that designation in my area? How do I choose someone?
Well, you've got a couple of options right there at the top of the page. If you go to faithfi.com and click find a CKA, just above the search box is a button that says questions to ask a CKA. You could certainly use that list of questions to interview any advisor, and hopefully that would be a free, helpful tool for you.
I will also mention that if you're willing to expand the search, perhaps you're in a smaller city there in Arkansas and you'd want to switch your search to maybe the next closest, larger city. What you may find is there may not be one in your backyard, but maybe 125 miles away there's somebody, and more and more advisors are willing to work virtually. So maybe you go visit once a year, but the rest of the meetings are done through Zoom or Google Meet or one of those video connection services, and you would just need to talk about that. Now, obviously, if you want somebody right down the street where you can pop into the office, then that doesn't work. But if you're willing to work remotely and virtually with your advisor, many financial advisors are doing that these days on the heels of COVID, more and more offer that service. So I think you've got two options. You could use our questions to interview somebody locally.
But if you really wanted somebody who shares your values, I would just expand your search or move it to the next largest city there in Arkansas and perhaps find somebody that you would not always visit face to face, but could still become your advisor. Okay. Well, thank you. All right. Absolutely. Thanks for your call, Lisa. We appreciate it. Let's head to Miami.
Hi, G. Go right ahead. Yes. Just a quick question, real quick. Is there any kind of formula you may use in terms of like, say, you have to repair a car and, you know, it's maybe worth more than what the car is worth or anything like that to kind of decide for whether you move into a new one or not? It's like, you know, they need to repair the car.
It's going to be about three thousand, but the car might be worth maybe four. So so it's kind of like, you know, right there. I mean, I mean, I know you say that the cheapest car will ever own is the one we currently have. Yeah. So, yeah.
Yeah. Generally, I mean, so this is a rule of thumb and that's all it is. Generally, if the cost of the vehicle repairs exceeds 50 percent of its current market value or more than one year's worth of payments, it may make sense to pass on it and just go ahead and, you know, think about getting your next automobile just because, you know, you're going to be putting a lot of money into a car that doesn't have a whole lot of value. And that means it's probably already up in age and so forth. And therefore, you know, you're beyond the benefits of replacing those parts and may end up spending more over time. So I think just given your situation, you're well beyond 50 percent when you get up a three thousand dollar repair job on a four thousand dollar car.
I think that's certainly into the range where you'd say, I'm not sure that it's worth me putting this kind of money in. Gotcha. OK, sounds good. Thanks. All right. God bless you, my friend. Thanks for calling today to St. Petersburg, Florida. Hey, Mark.
Go right ahead. Hey, I have a now 17 year term policy to protect my my mortgage, and I was wondering if that was a good use of my hundred thirty two dollars a month or whether it be better to use that to, you know, build up emergency fund and start maybe making an investment in IRA or something. Yeah, it's a great question, Mark. I mean, the purpose of insurance is to offset a risk that exists where your loss of income at your death would create a hardship for somebody else in your life. Most often a spouse, but it could be a dependent child or both. Is that the case? Would your you know, if the Lord were to call you home tomorrow, would there be a loss of income that would create a hardship for a dependent? No, I'm a I'm a widower and my kids are all grown.
Yeah. So you really don't need that. I mean, unless you just wanted to keep the house in the family. And the only way to do that was to have a policy that would cover the payoff of the mortgage so that, let's say, a family member could inherit it debt free. Then there wouldn't really be any need for the insurance because at your death, your will would dictate who gets your assets. And part of that would include the sale of the home, which would pay off the mortgage. And then the 50 percent of the equity that's available would then pass according to your wishes. So there's really not a need for life insurance here at this point, which means you could recapture that hundred and thirty dollars a month and continue to build up your emergency fund, as you said.
And then beyond that, maybe a fund, you know, another retirement account that you could access down the road or leave as an inheritance or perhaps pass on to a ministry or charity. So I think in this case, the just based on what I'm hearing, the term life is unnecessary. OK. All right. OK. Thank you very much. I appreciate it. You're welcome, Mark. We appreciate your call today. God bless you, my friend. Well, once again, our time went by way too fast, but tune in next time and we'll do it all over again. Before we go, I'd like to thank our incredible production team, Amy, Devin, Jim, Robert, Brandy, Rob and Ben.
Couldn't do it without them. Have a great rest of your day. And I'll see you again next time for another edition of Faith and Finance. Faith and Finance is provided by FaithFi and listeners like you.
