It’s that time again. The time when I review the market’s performance and important metrics for the quarter.

In short, it was a strong quarter for most assets. However, market valuations continue to get stretched to extremes implying the ultimate snapback will need to be that much greater. In fact, valuations have only been this high two other times since 1900. The first time was right before the Great
Depression and the second time was at the Dot-Com Bubble

Therefore, it is reasonable to expect subdued returns over
the next ten years and plan accordingly.

Q2 Market Performance
I’ll just briefly summarize various index returns for the quarter so we can get to more meaningful insights. International stocks continue to be the top performer.


U.S. Stock Market Valuations
Today’s price of a future cash flow determines your return. For instance, if you exchange $50 now to receive $100 in ten years that implies a 100% return. If, however, you exchange $90 today for that same $100 in ten years your return drops to 11%. So price paid today is extremely important in determining future returns.

When it comes to the broader market, there are a few valuation metrics that have historically been quite reliable in forecasting 10-12 year stock market returns. The two I refer to most frequently are (1) Shiller PE and (2) Market Cap to GDP.

SPOILER ALERT: There is no doubt in my mind that valuations today are at very high levels implying real U.S. stock market returns over the next ten years will likely be significantly below historical averages. I believe today is more akin to buying a $100 future cash flow for $90 rather than the $50 we’ve come to expect historically, but read on to find out why that is.

Shiller P/E

Shiller P/E is the S&P 500’s current price divided by 10-years of average inflation-adjusted earnings. It’s historically been quite reliable in providing insight into returns over the subsequent ten years (far more reliable than any other P/E measure often quoted by financial professionals and economists).

As of June 30th, this measure stood at almost 2 standard deviations above its long-term average. This level has only been breached two other times since 1900!

The first time that critical level was breached was right before the Great Depression and the second was at the Dot-Com Bubble peak…not good company to keep.

Market Cap to GDP (The Warren Buffett Indicator)

Market Cap to GDP measures the total value of the U.S. stock market and divides it by U.S. GDP. This is often referred to as the Warren Buffett indicator because he was quoted in 2001 as saying it’s likely the “best single measure of where valuations stand at any given moment.” Historically, it’s been very reliable in forecasting subsequent ten-year market returns.

By this metric, current U.S. stock market valuations are almost back to where they were at the dot-com bubble peak.


Hours of Work to Buy the S&P 500

Yesterday, I came across the chart below for the first time.

Although you might not find it relevant to your situation, it is helpful in ascertaining how expensive or cheap the market may be relative to the underlying economy. After all, price or return alone tells you nothing about valuation. You have to compare price to something else (e.g. earnings, wages, GDP, sales).


It has never taken more hours of work for the median worker to buy a unit of the S&P 500.

Auto Sales
One bright spot in the sluggish economy over the last eight years has been auto sales. However, it appears even auto sales have begun plateauing / declining over the last year.


Debt Update
I usually look at two debt statistics: (1) Federal Government Debt / GDP and (2) Total Debt / GDP (includes government, business, and household debt).

First, we notice federal government debt has absolutely exploded since the Great Recession. The chart below shows total federal debt as a percentage of GDP. Notice we’re almost back to the Great Depression / WWII peak. The difference between then and now is that the private sector has far more debt today than it did back in the mid-1940s.


This second chart doesn’t quite go all the way back to the mid-1940s but the total debt to GDP back then was only about 150%, with the vast majority of that being federal government’s share. Today, however, the total debt / GDP is 350%, so barely an improvement from the Financial Crisis peak of 380%. Federal debt, even as high as it is, currently makes up just one-third of the total. Basically, everyone is over-indebted today


The more debt an individual, business or government has the more fragile they become. All those groups appear to be over-levered so all those groups are fragile. Just imagine a household with too much debt…one health emergency or major home repair or layoff causes significant financial issues for the family and, worst case, bankruptcy.

Too much debt also causes economic growth to be much slower, hence the anemic 2% GDP growth since the Great Recession. Too much debt also causes the economy to be far more vulnerable to shocks. Too much debt also limits the ability for the Federal Government to stimulate growth in the case of slowing / negative economic growth (i.e. recession). In fact, this debt load we’re carrying now is primarily the result of the federal government’s multiple attempts to stimulate growth and insulate the economy from the last two recessions. That worked out well, eh? Instead of healing our disease they only made us sicker although it felt good for a few years.

Furthermore, this much debt makes it very difficult for the Fed to fight inflation if inflation were to rise beyond their target. Why? Because they have very little room to raise interest rates. Imagine raising interest rates with this much debt? Debt service costs for anyone with a lot of debt, or anyone looking to borrow, would soar. That’s the difference between today and the early-1980s. The Fed was able to fight inflation by raising interest rates to 20%. They could never do that today. The U.S. would be rendered insolvent.

How does your portfolio look? Are you confident your financial independence will be protected across a variety of market and economic outcomes? If not, then don’t hesitate to reach out for a second opinion. You have nothing to lose and so much to gain.

Kindest Regards,



Ken Melotte, CFP®



Past performance is no guarantee of future results. 

No one or two charts can be completely relied on for return forecasts as there are so many variables that impact returns.

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