The equity bull market rumbles on, now in its seventh year, and stock market valuations are stretching once again. As investors reach for yield, they are bidding up stock prices and valuations above pre-2007 levels. When you compare the value of US equities to corporate net worth, for example, the ratio (Tobin's Q) indicates US stocks are more expensive today than at any other time in history with the exception of 2000. Valuation alone is not a timing tool but we continue to advise caution and do not recommend carrying an overweight position in stocks at the present time.
The market capitalization of US corporate equities relative to US GDP tells a similar tale. US equities remain approximately 2 standard deviations above their long-term average valuation.
We are also concerned about the extent to which investors are borrowing to invest in the stock market. Real growth in NYSE margin debt captures this trend and is approaching its all time high reached in February 2014. As long as folks continue to borrow to invest and remain confident in their market outlook, stocks should continue to do ok. Once margin debt turns lower however, as it did in March 2000 and July 2007, it coincided with medium-term peaks in the stock market each time.