How to value the stock market

You can value the stock market in different ways.

1) The most common way is through Price to Earnings (P/E) multiples. Right now the market is being valued around 22 which is historically high for the stock market.

2) However if you look at the stock market in yield terms. Right now United States Treasuries are near historic lows. (2 year, 5 year, 10 year, 30 year). They are all low meaning the value of investing riskless capital is being constrained. There are over 10 trillion USD in government bonds (in Europe not the United States) that pay a negative interest rate. Essentially you are paying to hold onto many government bonds.

This means people are looking to the stock market or other investment vehicles to gain yield/interest/dividends.

3) Also you can look at the stock market in comparison to the size of the economy. Right now the stock market valuation is around 30 Trillion USD and the GDP is around 20 Trillion USD (in the United States). This measure is most widely used by Warren Buffett and his adherents.

These are 3 ways of valuing the stock market. I hope you have gained some insight that can help you on your journey.

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