SMI on the Radio: The Implications of an Overpriced Stock Market (audio & transcript)

Sep 20, 2023
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Many observers think the current stock market is overpriced. Market valuations are worth understanding because whether stocks are "cheap" or "expensive" has implications for future returns, as SMI's executive editor Mark Biller explained yesterday on Faith & Finance.

Mark and host Rob West also fielded listener questions.

Click the arrow below to listen. Scroll down for the transcript.

Faith & Finance airs each weekday morning on American Family Radio. A different version airs weekday afternoons on Moody Radio.

(For more radio appearances by members of the SMI team, visit our Resources page.)


Rob West:
Are stocks overvalued right now? No doubt, some are. Better question: Is the market as a whole overvalued?

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 onto your calls at 800-525-7000. This is Faith & Finance on American Family Radio — biblical wisdom for your financial decisions. (theme music ends)

Well, our good friend Mark Biller is executive editor at Sound Mind Investing, where they burn the midnight oil studying things like "market valuation." It's always a party over there.

Mark, great to have you back with us.

Mark Biller:
Thanks, Rob. Sure. Sounds exciting, doesn't it?

Rob West:
No doubt. All right, let's dive in, Mark. You've got an article in the latest sound mind investing newsletter titled Measuring the Market's Valuation. Help us understand first what you mean by "market valuation, and why is it important.

Mark Biller:
Yeah, great question, Rob. To understand how the stock market can be overvalued or undervalued, we've got to understand first what stocks actually are. So when you own a share of stock, you have a tiny claim on the results of that business — in other words, the amount of profit 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.

And all of that is why, in contrast to something like gold — which we discussed last month — financial people talk about how stocks can grow your purchasing power over time. The idea is if you own the right stocks and those companies perform well, your ownership gets more valuable over time and hopefully increases in value faster than the rate of inflation.

So, once we establish that a share of stock is actually a claim on a sliver of that company's earnings, from there 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.

Rob West:
Now, it's important to recognize that the price investors are willing to pay for company earnings changes over time, right?

Mark Biller:
Yeah, absolutely. And that's kind of a weird thing for people if they've never really thought about it before, but it's true. 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. There are certain times when investors will pay a lot for a little bit of earnings, and then other times when — as a group — investors demand a bargain and they will pay very little.

So, if you've thought about it that way before, it's odd. But it's this change in investor attitudes that's really a big factor that drives extended bull markets. That happens, largely, when investors are getting really optimistic about the future, and they're willing to pay high prices for company earnings. And it's also a factor in bear markets when stocks have been falling.

Usually, bear markets will have some other catalyst as well, like an economic recession. But a big part of it is that investors are swinging from optimism in a bull market to pessimism during a bear market, and that can cause the amount that they're willing to pay for the same dollar of earnings to decline pretty dramatically.

Rob West:
We're going to get to the million-dollar question here in just a second: "What does all of this say about where the market's headed from here?" But for just a second, I'm going to restrain myself because you offer some important warnings about market valuation in your article. So, share those with us first.

Mark Biller:
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. You have to remember that we're looking at the market's current valuation and comparing that to its valuation at other points in the past. So, as we look back through market history, we can see a period, say, like the end of the dot-com bubble in the late '90s, and we can see, yeah, stocks were really very expensive at that particular point. Or we might fast forward a little further, and at the end of the great financial crisis in 2008, we can see that stocks were really cheap there.

And by doing that, by looking at these high points and low points over history, we get an idea of where the extremes are. So, in other words, we can say most of the time the market is valued in "this certain range," but when it gets this high, watch out! Or when it gets this low, we've really got a "bargain."

And the problem is that the market can reach those levels that start to signal that it's either really expensive or really cheap, and then it can stay there for quite a long time. So, for example, one of the best examples I can think of this is in the late '90s — that dot-com bubble — there was an infamous speech by Fed chairman Alan Greenspan in 1996 where he used what became kind of a famous phrase where he said the stock market was "irrationally exuberant."

And he was right. There was a bubble forming. We know that looking back in hindsight. The thing is, that was 1996, and the market didn't peak until early 2000! So you had almost three-and-a-half years of the stock market continuing to go up even after people were saying, "Wow, this is really an expensive market."

So the point of all that is we really can't use market valuation as a short-term timing tool, which, of course, then raises the question, "Well, what good is it? What can we use it for?"

And the main thing that market valuation is helpful for is giving us a longer-range projection of what we can expect from the market — what type of returns we can expect. And that's because research has shown that market valuation is very predictive of future market returns, but only over a longer-term period, like seven to 12 years.

So we'll just say, over the next decade or so, you can tell — if you're starting from a starting point, a very high market valuation — what that tells you is the next decade or so is probably going to give you below-average returns. And the same is true when you're at a very low starting point. That's a great time to be looking out over the next decade or so because returns are probably going to be above average from that low starting point.

Rob West:
Yeah, that was really helpful, Mark.

By the way, what does all this have to do with your portfolio? Are you just starting out? Are you in retirement? Do you have questions? Mark's here to answer those questions, and we'll turn to your phone calls here in just a moment. 800-525-7000. You can call right now.

So the point you're making here, Mark, is that we shouldn't necessarily run out and make a bunch of trades based on [valuation] information. So then, how can we use it to help us actually make decisions?

Mark Biller:
One main way is to let that information inform your planning. So, for example, if you know that market valuations are high today and you know that, historically, that suggests that returns will likely be below average over the next decade or so, you might want to use more conservative return projections as you're thinking about your retirement plans.

So whether you're doing this on your own or maybe an advisor is helping you using some sort of financial planning software that allows you to adjust those future return expectations, that can be really helpful to plug in a little bit lower projection — which can then help a person realize they may need to adjust their savings rate, they may need to adjust their plans of exactly how long they plan to work before retiring. It really helps you sort through some of those types of planning decisions.

Rob West:
Yeah. All right, we've kept folks in suspense long enough, Mark. So, what do the various measures say about the market's valuation right now?

Mark Biller:
Yeah, well, unfortunately, the news isn't great on that score. Most measures suggest that the market is pretty expensive today — not as bad as it was, say, at the end of 2021 before we had last year's correction, but still high historically.

And that really shouldn't be a huge surprise. If you think back, we had over a decade between 2008's financial crisis and the bear market that ended in 2009, and then the COVID shock in 2020. We didn't have any recessions or really any bear markets to speak of in that long stretch. The market just kept chugging higher. And then the stock market fell for a whopping one whole month in March of 2020 before the Fed and the government really kicked it into overdrive with all the stimulus.

So, we did have that reprieve last year, where the market got a little cheaper during the pullback. So valuations aren't at their worst extremes that we've seen lately, but really, by almost any measure, stocks are somewhere between pretty expensive and kind of make-your-eyes-bleed expensive.

Rob West:
Which you never want to get to that level. That's for sure.

Mark Biller:
No, that's a bad level.

Rob West:
Yeah. It is kind of surprising though, Mark, isn't it that we haven't seen much of a correction, let alone a [renewed] bear market.

We know the market looks out six-to-12 months. We know the labor market is starting to weaken. We know savings levels are dropping. We're seeing all of these things going on, including just the global challenges that we have. It's almost like the recession handwriting is on the wall — and yet the market's been holding up. Is that surprising to you?

Mark Biller:
It is surprising — and I think it's been surprising to most everyone, which is why we've been hearing these projections of a recession and concerns about a continued bear market for over a year now. And it still hasn't — this recession hasn't arrived. The market has bounced back. So it's been a very confusing time for most investors and most market watchers for sure.

Rob West:
Yeah, no doubt. All right, when we come back, your questions — 800-525-7000. Also, when we get into periods like this where the market is overvalued, how do these types of situations typically resolve?

Much more to come on Faith & Finance on American Family Radio with Mark Biller. Stick around.

Rob West:
Great to have you with us today on Faith & Finance on American Family Radio. I'm Rob West. Mark Biller here today — and you heard it here first: The official valuation of stocks: "somewhere between pretty expensive and make your eyes bleed expensive."

(chuckle) At least, that's what Mark Biller said just a moment ago. What does that all mean for your portfolio? We've got lines open today. It's time to take your questions. Mark Biller — ready to answer them at 800-525-7000.

Let's head to the phones. To Texas. Aaron is a first-time caller. Go ahead, sir.

Yes, I recently lost my job, but I have a little over $100,000 in a 401(k) and it's all invested in the company I was working for — and the company is a Fortune 500 company and so I don't see it going down at all with the times we're having. But now I'm in a position where I could possibly move some to an IRA and kind of make some different investments or possibly maybe get a little bit of gold with it, or something like that. So I was kind of curious on what y'all's thoughts were with that.

Mark Biller:
Yeah, so Aaron, it's great that you're honed in on the idea that having all of that in any particular company's stock is a risky thing. No matter how good the company, that just piles a lot of company-specific risk into your portfolio. So our general rule of thumb — that we use with our Sound Mind Investing folks — is we tell them you should never have more than 15% of your total portfolio in any single company, whether that's your own company's stock or any other company. So that's a rough rule of thumb — and now that you're separated from this company, you probably don't even want to keep that much. That's a lot in our way of thinking. 15% is a lot to have in one company.

So I think you're absolutely on the right track in terms of thinking about moving that retirement money to an IRA, and then from there investing through that IRA in a more broadly diversified way — probably using some broad market index funds would be an easy way to get that diversification, or at least using some more diversified mutual funds.

That's a real easy way to get a lot of different companies in a single investment. You buy one mutual fund and you're getting hundreds of different companies in that single investment. So that's a good way to easily be able to diversify between maybe large-company stocks, a smaller amount of small-company stocks, maybe some bonds. And like you said, if you want to mix in a small allocation to gold, precious metals, you can do that easily through that IRA investment as well.

We talked last month about the pros and cons of owning the physical metals. Sometimes within a retirement account, it's easier to own the gold ETFs that we discussed last month, so you may want to listen to that broadcast from last month to review some of those options.

But that would be how I would look at that. I think you're on the right track for sure.

Rob, your thoughts?

Rob West:
Yeah, I couldn't agree more. Let me ask you, Aaron, are you looking for another job? Have you already secured a job with a new employer?

I have not yet. I'm currently looking, but I was approached by a company that we used to do business with and they have a position coming open fairly soon, and so they've — I guess made it very clear that they love me to come work for 'em. So that's what I'm holding out at the moment.

Rob West:
Well, I'm delighted to hear that.

Mark, how do you help folks process, assuming his new employer would allow him to roll his 401(k) into maybe a new 401(k) with his new employer — that versus going to the IRA while he's still in his working years?

Mark Biller:
Yeah, it's really more of a personal preference kind of thing. If you're planning to use broad-based index funds, like I was just describing, most 401(k) plans are going to offer those. So then it's just kind of a situation of looking at the options in the new 401(k) and deciding, "Do those options meet the way that I want to invest my money?" And if they do, there's usually very little downside to just rolling that to the new 401(k).

It is always a good idea to try to investigate the costs because while they're usually pretty low, there are exceptions to that. There are some 401(k) plans that have some additional fees and things — higher fees than are typical. Normally where we run into the "I want to move it to an IRA" side of things is if people look at the list of investment options in the 401(k) and say, "Y'know, there's some things I'd like to do that aren't going to be easy to do within the 401(k)." And that flexibility is really the biggest advantage of the IRA because you roll it to an IRA with Fidelity or Schwab or whoever you choose to use, and you've basically got every investment option under the sun available to you through the IRA.

So, for somebody following our programs at Sound Mind Investing, that flexibility could be a big deal. But for a lot of people who really just want to pop this into a handful of index funds, the 401(k) is easy. You're going to be using that at the new employer anyway, so that can be a little bit easier option for a lot of people.

Rob West:
Yeah, very good. So, in summary, Aaron, [you] definitely need to diversify away from that highly concentrated position of your previous employer. Absolutely, you could invest in some gold or precious metals, but probably best to use a basket of investments like indexes or high-quality funds.

If you want an advisor to manage this for you, you could look for a certified Kingdom advisor in your area on our website, Just click "Find a CKA." Or, our friends at Sound Mind Investing could give you some great mutual fund suggestions to go along with this. Thanks for your call.

Let's go to Alabama. Hi, Michael! Thanks for calling. Go ahead.

Hi, thank you. I'm 63-plus [and I'd] like to retire at 65, and [I] should be debt-free by the time I retire. Me and my wife both have about 25% of our funds in an American Funds' Roth, and she has a 401(k) with about 25% in it. And then I have an IRA money market account that I moved into — about $200,000. Kind of really want to move it into a CD because earning something, and it didn't know whether I could purchase that CD. And also kind of where I need to start looking really quick 'cause I feel like we're on the edge of maybe a recession, and [the] market's so high [I] can't go into it.

Rob West:
Let me ask you this, Michael, and we'll get Mark's thoughts here in just a moment. Have you done your retirement budget, and do you have a sense of how much you'll need to pull from these investments to supplement Social Security if you're going to start drawing it as soon as you retire?

If we can pull a solid 3-and-a-half to 4%, I think we could be okay.

Rob West:
Very good. Mark, your thoughts?

Mark Biller:
Yeah, well, Michael, the really nice thing is that for the first time in about 15 years, that type of 3-and-a-half to 4% rate of return that you just mentioned is available risk-free through very safe investments, whether those be treasury bonds or like you mentioned a CD or a money market fund — investments where you really don't have to take any risk at all. And that is very different from the planning environment that we've had over the last 10 to 15 years. So that's a huge plus. That really makes things a lot easier in terms of trying to come up with that type of rate of return.

Now, the one thing that I would say is a lot of folks, as they hit retirement — kind of the stage exactly where you're at right now — they tend to want to get really conservative with their overall investment mix. And you just have to be a little bit careful with that because the numbers — the actuarial numbers — tell us that a couple that's retiring at 65 years old today, the chances about 50-50 that one of you is going to live into your 90s. Now, a lot of people are surprised to hear that, but what it tells us is we do need to still be looking out for a fairly extended period of making this money last.

You definitely do want to pull in the reins and get more conservative as retirement approaches and arrives, but you don't want to go too far with that because you do still need to keep some of this money growing to keep your purchasing power at least keeping up with inflation. So that's something to keep in mind.

CDs can be tricky within retirement accounts, but like I said, a good quality money-market fund is going to be yielding almost exactly the same as a good CD — maybe just a tick less, but not much less. And Treasury bonds are very attractive right now as well.

So I think you can probably keep that. I'm assuming that 25% you mentioned — the American Funds — is mostly stock-oriented. I would say that's a minimum level that you'd want to have still in stocks as you're in your early retirement years.

And you might even be just wanting to keep an eye out, Michael — I know you're concerned, as I am as well, that there could be a market drop ahead — but I would encourage you that if that does happen, that you might want to look at that as an opportunity to actually lean into that kind of stock market decline to boost your exposure to stocks a little bit. If it really is as low as 25% of your total portfolio, that might be a time to actually add a little bit because stocks over the longer term — and I know it's weird to think about longer term when you're on the precipice of retiring, but you do want to be thinking, "What if I need this money to last me 10, 20 even 30 years from here?"

So those would be my general thoughts there. It sounds like you're in great shape. As Rob mentioned, the key to this whole thing is lining up your spending, figuring out what that retirement spending budget is going to look like, and then figuring out what type of rate of return you need to earn in order to keep everything on track.

Rob, I'm sure you've got some thoughts as well.

Rob West:
Well, no, I think you're right on there. I think the big high-level idea here, Michael, is that you probably want to think about around a 30% allocation to stocks at a minimum. Now, whether it stays at 25% and you bump that up during the recession, if that's where we're headed, like Mark said, I think that would be fine. Maybe you have an allocation of precious metals and then you have largely fixed-income bonds, CDs, money market, that type of thing.

This may be the season where you engage an advisor, as well. You've worked long and hard to build this significant nest egg of $800,000. And so I think having somebody that's managing this on a day-to-day basis — with your goals and objectives in mind, as conservative as you want to be — but where you're not bearing the weight of that, I think makes a lot of sense:, or look for a [Certified Kingdom Advisor] in your area a

Well, Mark, let's just tie a bow on this [valuation issue] with a couple of things. Number one is obviously what you were sharing about the market's valuation being high, to say the least, is not the best news. Are there any other factors, though, that can affect market valuations? And how do these types of situations typically resolve?

Mark Biller:
Yeah, there are, Rob. One trend, just the general trend, is that all of these valuation metrics have been going up over time. So when you look at the last 20 years, the valuations have been higher than the 20 years before that. So it is possible that even though things look kind of extreme right now that they're less extreme because of this trending higher in valuations.

Typically — unfortunately — these high valuation periods tend to resolve through bear markets. They tend to adjust more quickly like that, as opposed to long, drawn-out periods where things just come back into line. So I think that's really the big takeaway is just to — even though we had this pullback last year — to understand that over the next seven-to-10 years, we may be looking at another one or two of these types of bear markets.

So you really want to have your plan, your "bear market plan" in place — hopefully, written down, but at least have thought through, "How am I going to handle [it] if we do have another 25 to 40% drop in the market at some point in the next say five years? What's my game plan?"

And that's where I think thinking through that ahead of time is going to make you much better prepared to not make poor decisions when the bullets start flying in another bear market.

Rob West:
We've got just about less than a minute left, Mark. Let's finish with just some hope and encouragement for those who maybe find themselves a bit anxious at this time. What would you say?

Mark Biller:
Yeah, absolutely. Y'know, think long-term. Obviously, our hope is not in these financial markets or our own planning. Our hope is in the Lord. So we just want to be good stewards and do the best we can, learn what we can, and put in practice what we've learned, and do the best we know how to do and trust the Lord with the rest.

Rob West:
Yeah, that's well said. Mark Biller joining us today from Thanks for stopping by, my friend.

Mark Biller:
Thanks, Rob.

Rob West:
All right. If you'd like to read this article we've been talking about today, Measuring the Market's Valuation, check it out at It's there for you to read — no subscription to SMI required.

Well, folks, it's been a delight to be along with you today. On behalf of my team — Robert Youngblood, Robert Sutherland, and Devin Patrick — I'm Rob West. For Mark Biller, thanks for being on Faith & Finance on American Family Radio today.

We appreciate your calls and encouragement. If you'd like to support our work, you can do that Just click "Give."

In the meantime, may the Lord bless you, come back and join us tomorrow. We'll see you then. Bye-bye.

AFR Disclaimer:
The views and opinions expressed in this broadcast may not necessarily reflect those of the American Family Association or American Family Radio.

Written by

Joseph Slife

Joseph Slife

Joseph Slife has been a news writer for the Associated Press, a college instructor, and a radio host. He and his wife Joye have three grown sons.

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