3 Stock Market Charts That Are Potentially Mind-Blowing

There’s a lot of useful news and analysis out there for investors, but a lot of what you’ll find usually isn’t as informative as good hard data. When you find multiple bits of data that, taken together, tell a clear story about what’s going on in the stock market today, you can get an important edge that might help your portfolio.

Today we are going to take a closer look at three charts showing data that, when combined, tell an important and potentially mind-blowing financial story. If you invest, you should consider using this information to plan for what’s coming up in the market and better manage your portfolio for the long term.

1. The S&P 500 Shiller P/E ratio

The price-to-earnings ratio is a popular metric used by investors when analyzing a stock because it evaluates a stock based on its price in comparison to its earnings for the past year. If a stock’s P/E ratio is too high relative to peers, it might indicate the stock is over-priced and investors might want to wait for a price correction before buying in.

Some analysts apply the P/E ratio to market indexes. The Shiller S&P 500 P/E Ratio, for instance, can give us an idea of how expensive stocks are in general. What’s unique about this ratio is that instead of dividing by the earnings of one year, this ratio divides the price of the S&P 500 index by the average inflation-adjusted earnings of the previous 10 years. When this ratio gets too high, it often corresponds with the end of a bull market (i.e. a market correction).

Right now, this ratio, also known as the cyclically adjusted price-to-earnings (CAPE) ratio, is at its highest level since the 2000 dot-com bubble. That data point absolutely warrants further research and it’s something investors would be wise to monitor. It’s not necessarily a reason to panic, though, because there’s no slam-dunk proof that we’re on the verge of a market crash.

S&P 500 Shiller CAPE ratio data by YCharts.

There are a few reasons the CAPE ratio is so high right now. Investors became very bullish following the COVID-19 market correction. Equities have had an excellent 18-month run since then, led by growth stocks. Rising valuations have been supported by economic recovery, government stimulus, and low interest rates (more on that later).

High-growth companies also make up more of the S&P 500 index than ever before. The seven largest stocks in this index are all in the tech sector, and they make up more than 25% of the total index weight. These companies have higher growth potential than mature giants from other sectors, which usually leads to higher valuation ratios. This naturally inflates the CAPE.

2. The S&P 500 dividend yield

A healthy dividend yield is essential for income investors and retirees. Looking at average yield across full indexes allows us to assess the opportunities available. If yields are too low, then investors might have to adjust their cash flow…